The pros and cons of a PEP for larger employers

Pooled employer plans (PEPs) have earned their reputation as a practical solution for smaller employers. But as adoption grows, larger, more sophisticated retirement plan sponsors have started wondering whether a PEP might work for them, too. The answer, however, is complicated and advisers should know why before they broach the topic.

Why PEPs were created in the first place

A PEP is a single defined contribution plan shared by multiple unrelated employers. Instead of each company sponsoring and administering its own 401(k), they participate together in one plan run by a pooled plan provider (PPP) that serves as the plan's named fiduciary and administrator, coordinating compliance, recordkeeping, government filings, participant notices and all other functions required to operate the plan. The underlying mechanics are identical to a traditional 401(k). Contribution limits, tax treatment and participant rights are all unchanged. 

The case for PEPs, as outlined under the SECURE Act of 2019, starts with a simple premise: most of the things that make offering a retirement plan difficult for smaller employers are problems of scale. A 401(k) is not impossible for a smaller employer to manage independently, but doing it well requires time, expertise and resources. By bringing multiple employers together under one plan run by a professional administrator, PEPs deliver the kind of administrative infrastructure and access to institutional price points previously available only to large plans.

For employers without the scale, internal expertise or administrative bandwidth to efficiently sponsor a standalone 401(k), whether they have never offered a retirement plan or are looking to reduce the operational and fiduciary burden of an existing plan, PEPs represent more than just time and cost savings. They reduce the fiduciary, compliance and operational complexity that has historically made plan sponsorship resource-intensive, enabling smaller and midsize companies to offer a benefit competitive with their larger peers and improving retirement security for the nearly half of all Americans who work for them.

Where the market stands

According to a study by Cerulli Associates, more than 50,000 employers have now adopted a PEP. At the end of 2024, the most recent year for which data is available, about $21 billion in assets were held in one of more than 339 available PEPs. To encourage broader adoption of PEPs, the U.S. Department of Labor has been considering safe harbor protections for employers that follow defined steps in selecting a PPP. 

Recently, the PEP model has even been extended to 403(b) plans for nonprofits, a segment that has historically had limited access to quality retirement infrastructure. The employers driving the growth are still overwhelmingly the ones PEPs were designed for: small businesses and organizations that previously offered no retirement savings plan at all, for whom the pooled structure represents a genuine first step toward competitive benefits.

Interest among midsize and large employers is growing but remains largely in the consideration phase. Behind those conversations is a familiar set of pressures: mounting litigation concerns, the grind of plan administration and a growing belief that a structure delivering this much value to smaller employers might have something to offer at greater scale. 

Why large employers want a piece of PEPs

Large employers considering a PEP may be drawn in by the promise of administrative relief. But most are not managing audits, Form 5500 filings and compliance entirely in-house today. They already rely on third-party administrators, auditors, ERISA counsel, recordkeepers and investment advisers to handle much of the operational burden associated with running a retirement plan. 

For many large employers, then, the bigger draw is not administrative convenience. It is the belief that a PEP offers meaningful protection from growing fiduciary litigation exposure. ERISA litigation has been climbing and a PPP stepping in as named fiduciary can look like a structural way to reduce exposure. That perception is driving real conversations at large organizations and it is not entirely wrong. A PEP can reduce, but not eliminate, an adopting employer's fiduciary responsibilities.

However, the advantages that draw large employers toward PEPs also come with meaningful tradeoffs.

What you give up when you pool

PEPs may preserve employer choice in important areas such as eligibility, matching contributions, vesting schedules and automatic enrollment. But those choices exist within the structure established by the PPP, not within a fully independent plan. For employers whose plans reflect years of custom governance, amendment authority and operational decision-making, that is not a minor concession. Inside a PEP, many of those responsibilities shift to the provider.

Investment control is equally constrained. Fund lineups are standardized across adopting employers and decisions about replacing underperforming investments belong to the PPP. An employer that has spent years building its investment governance process cannot simply carry that structure into the pool.

For some employers, that tradeoff may be worthwhile. But a PEP is not the only way to reduce fiduciary burden. A 3(38) investment adviser can assume discretionary responsibility over plan investments without the employer giving up plan design authority or broader governance control. Large employers also typically already have the asset scale to negotiate competitive fees independently, reducing some of the economies-of-scale advantage that makes PEPs attractive to smaller employers.

Loss of governance tends to surprise employers the most. Plan amendments, fund changes and operational decisions ultimately run through the PPP across all adopting employers, regardless of plan size.

Why larger employers are still on the fiduciary hook

The promise of reducing fiduciary responsibility is one of the most attractive aspects of a PEP. The PPP becomes the named fiduciary, the compliance calendar shifts elsewhere and the governance burden appears lighter.

But fiduciary responsibility does not disappear. It becomes concentrated in the decision to select and monitor the PPP itself. A PEP can reduce certain fiduciary burdens, but employers still retain an obligation to evaluate the provider prudently and monitor the relationship over time.

Safe harbor rules may eventually provide employers with clearer guidance around provider selection and monitoring. But they will not eliminate the underlying fiduciary obligation itself.

A question of control

PEPs are a legitimate solution and for many employers they deliver exactly what they promise: lower administrative burden, reduced complexity and access to retirement plan infrastructure that might otherwise be out of reach.

But joining a PEP is still a fiduciary decision, not an exit from one. Employers are not simply outsourcing administrative work. They are also deciding how much governance authority, investment discretion and plan-level control they are willing to place in someone else's hands.

For the employers PEPs were originally designed to serve, that tradeoff may be straightforward. For larger and more sophisticated plan sponsors, the calculation is often more complicated.