Understanding Pooled Employer Plans: Navigating Fiduciary Risks in a Growing Market

The landscape of retirement planning is evolving rapidly, driven largely by the emergence of pooled employer plans (PEPs). These innovative plans are designed to alleviate the administrative burden and costs associated with standalone 401(k) plans, particularly for smaller employers who may struggle with the complexities of retirement plan management. However, as the number of PEPs has surged—tripling from 2021 to 2024, according to Cerulli Associates—so too has a troubling misconception that joining a PEP absolves employers of fiduciary responsibilities. This article aims to clarify the intricacies of PEP participation, the fiduciary risks involved, and what employers need to know to safeguard their interests.

The Surge of PEPs: A New Era in Retirement Planning

Pooled Employer Plans emerged from the SECURE Act of 2019, which aimed to increase access to retirement savings for workers across the U.S. By allowing multiple employers to join a single retirement plan, PEPs offer a significant advantage in cost efficiency and administrative simplicity. For many small and mid-sized businesses, the prospect of sharing resources and administrative duties with other employers is a compelling incentive to join this growing trend.

Wendy Von Wald, assistant vice president and fiduciary product manager at Travelers, highlights that the appeal of PEPs resonates widely, as evidenced by the diverse range of organizations exploring this option, including various school systems. As PEP adoption accelerates, it’s crucial to recognize that while these plans may reduce certain burdens, they do not eliminate fiduciary responsibilities.

Fiduciary Responsibilities: What Employers Need to Know

One of the most significant misunderstandings surrounding PEPs is the belief that joining a PEP transfers all fiduciary responsibilities to the pooled plan provider (PPP). In reality, the legal framework established by ERISA (Employee Retirement Income Security Act) maintains that participating employers retain substantial fiduciary duties, specifically in two key areas:

• Selection and Monitoring of the PPP: Employers must prudently select and continually monitor the PPP, ensuring it meets performance expectations and adheres to legal standards.
• Investment and Management of Employee Assets: Employers remain responsible for overseeing the investment and management of their employees' assets unless those duties have been formally delegated.

As Von Wald emphasizes, the ongoing duty to monitor the PPP is essential. Employers are required to periodically review the PEP's operations and performance, addressing any employee complaints that arise. This monitoring should be akin to how employers oversee their own 401(k) plans, which includes scrutinizing fees, evaluating investment options, and ensuring compliance with regulatory requirements.

Navigating the Fine Print: Understanding PEP Agreements

Another critical aspect of PEP participation is the importance of thoroughly understanding the PEP agreement itself. This document outlines the allocation of liabilities and responsibilities, and employers must pay close attention to indemnification clauses. These provisions can significantly influence who bears financial exposure in the event of issues arising within the PEP.

Employers are often advised to consult with benefits brokers or legal counsel to dissect these agreements before signing. As Von Wald notes, the allocation of liability is not predetermined; it heavily relies on the specific terms of the PEP agreement. By comprehensively reviewing the agreement, employers can better manage their exposure to fiduciary risks.

Fiduciary Safe Harbors and Legal Considerations

The Department of Labor (DOL) is also exploring the introduction of fiduciary safe harbors for employers participating in PEPs. While this could provide additional protections, Von Wald cautions that such safe harbors are only beneficial if their conditions are meticulously followed. Moreover, recent legal shifts, including the Supreme Court's ruling in Loper Bright Enterprises v. Raimondo, may challenge the DOL's authority to enact safe harbors, raising further questions about their viability.

Employers should remain vigilant, as safe harbors can sometimes backfire. Plaintiffs may utilize the standards set forth in safe harbors to argue that a fiduciary has fallen short of their obligations. It is vital for employers to stay informed and proactive regarding their fiduciary duties, even amidst evolving regulatory frameworks.

Bridging the Knowledge Gap: The Importance of Fiduciary Training

Many smaller employers entering the PEP market may lack the necessary understanding of fiduciary standards. This gap in knowledge can lead to significant risks if decision-makers—often individuals not directly named as fiduciaries—are unaware of their responsibilities. Educating staff about the distinction between settlor acts (plan design, funding decisions) and fiduciary acts (administering the plan) is essential for mitigating liability risks.

Fiduciary training programs can equip HR and finance teams with the knowledge required to navigate the complexities of ERISA fiduciary standards effectively. Von Wald stresses that ensuring all personnel understand their roles and the implications of their decisions is a prudent investment for any employer looking to participate in a PEP.

Key Takeaways

• **Employers retain fiduciary responsibilities** even after joining a PEP, including monitoring the PPP and managing employee assets.
• **Thoroughly review PEP agreements** to understand the allocation of liabilities and indemnification obligations.
• **Consider fiduciary training** for staff to bridge the knowledge gap and ensure compliance with ERISA standards.
• **Monitor evolving regulations** regarding fiduciary safe harbors and adjust practices accordingly.
• **Consult benefits brokers** to navigate the complexities of PEP participation and fiduciary responsibilities.

Frequently Asked Questions

What are pooled employer plans (PEPs)?

Pooled Employer Plans are retirement plans that allow multiple employers to participate in a single plan, reducing the costs and administrative burdens typically associated with standalone 401(k) plans. PEPs provide a way for smaller employers to offer retirement benefits while sharing the responsibilities among several participating entities.

What fiduciary responsibilities do employers have when joining a PEP?

Employers retain critical fiduciary responsibilities under ERISA, including the duty to select and monitor the pooled plan provider and oversee the investment and management of their employees' plan assets. It is essential for employers to understand these responsibilities thoroughly to avoid potential legal liabilities.

How can employers mitigate fiduciary risks associated with PEPs?

Employers can mitigate fiduciary risks by conducting a thorough review of the PEP agreement, engaging in regular monitoring of the PPP, and ensuring that their staff is trained on fiduciary duties. Consulting with benefits brokers and legal counsel can also provide valuable insights into minimizing exposure to liability.

Are fiduciary safe harbors beneficial for employers in PEPs?

Fiduciary safe harbors can offer protections for employers, but they come with conditions that must be strictly adhered to. Employers should remain cautious and informed about any safe harbors introduced by the DOL, as these could be subject to legal challenges and may not provide absolute protection.