Employers offering company-sponsored retirement plans often rely on third-party advisors for expert guidance on plan provisions, investment choices, and overall plan governance to ensure the plan aligns with the best interests of both the company and its employees. However, issues can arise when these advisors fail to provide recommendations tailored to the employer’s specific needs or when they do not fully disclose important information, potentially leaving employers unaware of all relevant circumstances.
Following the regulatory changes introduced by the SECURE Act, Pooled Employer Plans (PEPs) have become a popular topic among financial and third-party advisors. These plans allow multiple unrelated employers to participate in a single 401(k) arrangement. While PEPs are often presented as a cost-effective and simplified solution for offering employee retirement benefits, there are several potential drawbacks that aren’t always fully disclosed during these advisor presentations. As a result, employers could find themselves facing unintended consequences and costs.
One of the most significant drawbacks of joining a PEP is the loss of flexibility and control. Employers participating in a PEP are generally required to follow the standardized provisions set by the Pooled Plan Provider depending on the plan. This limits their ability to customize some of the plan features, choose third party vendors, and perhaps most critically, the investment lineup. Consider the scenario where an employer wants to revise eligibility rules a year down the road or is dissatisfied with the available investment options. Depending on the PEP, they may find themselves locked into a structure where such changes aren’t possible, leaving them with little to no say in how the plan operates for their workforce. Additionally, many PEPs are administered by a designated third-party advisor or trust company, often selected as the preferred provider. Based on our experience working with some of these providers, we’ve identified several concerning issues. These include a lack of transparency and timely communication, cumbersome reporting processes, and—most critically—delays in remitting participant contributions to the plan, sometimes exceeding seven days after payroll is processed.
Another common misconception being communicated to employers is that joining a PEP eliminates fiduciary responsibilities and removes the need for an external audit. While it’s true that the Pooled Plan Provider assumes certain fiduciary duties, participating employers still retain the responsibility of overseeing the provider’s performance. If the PEP is mismanaged or fails to comply with ERISA regulations, the employer may still be held liable. Additionally, employers remain responsible for their own employees—this includes accurately processing deferrals through payroll and providing correct data to the PEP to ensure the plan is administered in line with its provisions. As for audits, while the PEP itself will undergo an external audit depending on participant count, participating employers in a PEP being audited are still required to supply payroll and company-specific information to support the audit process. If errors are found in the payroll process as part of the audit, the employer is still liable for making those corrections as well as any additional information needed for the audit due to the errors. From an auditor prospective, the most common compliance errors found in an audit are related to payroll processing and errors such as inaccurate withholdings on certain types of compensation. This responsibility does not change when moving from a single employer retirement plan to a PEP.
PEPs are also being marketed as a low-cost solution for employers. However, the fee structures can be complex and are frequently bundled into a single package, making it difficult to determine the cost of individual services. Furthermore, if fees are evenly distributed across all participating employers, smaller companies may end up subsidizing the costs for larger ones.
Considering a PEP but unsure if it’s the right long-term fit? Exiting a PEP isn’t as straightforward as it may appear. If an employer decides to leave a PEP—whether due to dissatisfaction or plan termination—they typically must establish a new single-employer plan and transfer all participant accounts from the PEP into the new structure. This transition can be complex, time-consuming, and potentially costly. Unlike with single-employer plans, employers participating in a PEP cannot simply terminate their portion of the plan independently.
Before making a significant change to your retirement plan, such as converting to a PEP, employers are strongly advised to take several critical steps. This includes seeking independent fiduciary advice, thoroughly researching third-party administrators (including reviewing their independent auditor’s report or SOC 1 report), conducting a comprehensive cost-benefit analysis, and fully understanding the potential impacts of the decision on both the organization and its employees.
Kelsa Tinsley, CPA, is an Audit Principal with DWC CPAs and Advisors. She has extensive experience in providing financial statement audits, reviews, compilations, agreed-upon procedures, and outsourced CFO and controller services for a diverse range of industries. As a recognized specialist in employee benefit plan audits, Kelsa holds an Advanced Employee Benefit Plans Audit Certification from the American Institute of CPAs. Kelsa also plays a key role in preparing business valuations alongside DWC’s ABV- and CVA-certified valuation analysts.
