Why the SECURE Act Made PEPs Possible—and What’s Next
The SECURE Act reshaped the retirement landscape in the United States by lowering barriers for employers to offer quality retirement benefits. One of its most consequential innovations was the creation of the Pooled Employer Plan (PEP). By allowing unrelated employers to band together in a single 401(k) plan overseen by a registered Pooled Plan Provider (PPP), the law opened a path to broader coverage, streamlined operations, and stronger fiduciary oversight. As the market matures, employers and advisors are asking what’s next—both in terms of uptake and regulatory refinement—and how PEPs compare to legacy structures like the Multiple Employer Plan (MEP).
From MEPs to PEPs: What Changed
Before the SECURE Act, employers that wanted to combine resources for retirement plan administration typically used a MEP. While MEPs offered economies of scale, they also came with hurdles. Chief among them was the “one bad apple” risk: a compliance failure by one participating employer could jeopardize the qualified status of the entire plan. In addition, most open MEP structures—those allowing unrelated employers—were constrained by regulatory ambiguity and practical frictions. Many sponsors either stayed with stand-alone 401(k) plan structure or joined association-based plans tied to industry groups.
The SECURE Act addressed these barriers by creating the PEP and requiring every PEP to be operated by a PPP registered with the Department of Labor and the Treasury. It also introduced a statutory “bad apple” fix, allowing a plan to mitigate or isolate noncompliant participating employers rather than punishing the entire plan. In doing so, Congress preserved the scaling benefits of consolidated plan administration while clarifying who does what—and who is liable—under ERISA.
How PEPs Work in Practice
At its core, a PEP centralizes plan governance. The PPP is responsible for fiduciary oversight of key functions and typically appoints other fiduciaries, such as a 3(16) plan administrator or a 3(38) investment manager. Employers join the PEP as participating employers rather than plan sponsors, offloading many of the day-to-day burdens of ERISA compliance and retirement plan administration. This shift can be profound for smaller and midsize employers that lack in-house benefits teams.
The PPP coordinates with recordkeepers, custodians, and investment providers, and it leads annual audit and Form 5500 filings at the plan level. By consolidating vendors and processes, PEPs can reduce redundant tasks and provide uniform plan documents, operational controls, and reporting. Many PPPs also standardize investment menus, apply consistent eligibility and vesting rules, and offer participant services that rival those of the largest single-employer plans.
Benefits and Trade-Offs
Potential advantages include:
Scale and cost efficiency: Consolidated plan administration can reduce duplicative audits, filings, and vendor negotiations, which may lower total plan costs over time. Reduced employer burden: Employers can rely on the PPP for plan governance, investment selection (if delegated), and ERISA compliance tasks that otherwise fall on internal staff. Stronger fiduciary framework: A PEP’s structure supports clear fiduciary oversight and accountability, potentially reducing the risk of operational errors. Competitive participant experience: Centralized design often translates into modern features—digital enrollment, managed accounts, and education—delivered uniformly.
Trade-offs to consider:
Less customization: While many PEPs offer design levers, they rarely allow the full customization available in a bespoke single-employer 401(k) plan structure. Vendor lock-in: Employers accept the PPP’s chosen recordkeeper, custodian, and investment lineup (unless the PEP explicitly permits alternatives). Shared governance: Employers relinquish some plan governance decisions; this is a benefit for many, but it reduces control.
PEPs vs. MEPs: A Practical Distinction
MEPs and PEPs both aggregate employers, but PEPs were intentionally designed for broad adoption by pooled employer 401k plan benefits unrelated employers with a modern compliance framework. In a traditional MEP, the sponsoring entity—often an association—plays a central role, and eligibility may be tied to commonality (such as industry). With PEPs, any eligible employer can join, as long as the PPP accepts them. The PPP must register, accept fiduciary responsibilities, and maintain robust operational controls. This regulatory clarity has accelerated market entry by insurers, recordkeepers, asset managers, and independent fiduciary firms seeking to operate as PPPs.
Key Roles and Responsibilities
Pooled Plan Provider: The PPP is the linchpin. It is responsible for operating the PEP, handling plan governance, ensuring ERISA compliance, coordinating with service providers, and often taking on 3(16) administrator duties. Many PPPs also appoint a 3(38) investment manager for discretionary control of the lineup. Participating Employer: Each employer adopts the PEP, maintains payroll and data feeds, fulfills limited administrative tasks, and ensures timely remittance of contributions. Employers may retain some fiduciary duties—such as prudent selection and monitoring of the PPP and the plan itself—but shed many day-to-day responsibilities. Service Providers: Recordkeepers, custodians, auditors, and investment managers deliver the infrastructure for consolidated plan administration, participant services, and compliance reporting.
Compliance and Risk Management
ERISA compliance does not vanish in a PEP—it shifts. Employers must prudently select and monitor the PPP and understand the scope of delegated authority. The PPP must maintain rigorous operational controls, cybersecurity practices, and documented processes. Annual plan-level audits typically apply once the PEP exceeds the participant threshold, replacing separate audits for each employer. The SECURE Act’s bad-apple relief allows the plan to spin off or otherwise isolate a noncompliant employer, protecting the rest of the PEP from disqualification risk.
What’s Next for PEPs
Growth across the middle market: Expect continued adoption among employers with fewer than 1,000 employees, especially those migrating from legacy single-employer plans seeking lower administrative burden and improved fiduciary oversight. More specialization: Niche PEPs are emerging—industry-focused, startup-friendly, or tailored to high-turnover workforces—with design features like auto-enrollment, auto-escalation, and tailored eligibility rules. Integration and data quality: Payroll integration remains a decisive factor. PPPs and recordkeepers are investing in tighter payroll connections to reduce errors, speed contributions, and enhance compliance testing. Transparent pricing: As competition intensifies, pricing will continue to unbundle. Look for clearer distinctions between PPP fees, recordkeeping fees, and investment expenses, improving fiduciary decision-making. Regulatory refinement: Agencies may continue issuing guidance around PPP registration, cybersecurity expectations, fee disclosures, and handling of noncompliant employers. State-facilitated auto-IRA programs may also influence private-market adoption dynamics. Convergence with other plan designs: Some sponsors will evaluate whether a PEP could sit alongside or replace a closed MEP, or whether a plan-of-plans aggregator model with delegated 3(16) and 3(38) services achieves similar outcomes. The market will not be one-size-fits-all.
How to Evaluate Joining a PEP
Governance model: Clarify which fiduciary duties the PPP assumes and where the employer retains responsibility. Review the PPP’s experience, staffing, and oversight structure. Investment framework: Determine whether the PEP uses a 3(38) manager, its monitoring process, QDIA approach, and how changes are communicated. Fees and benchmarking: Request transparent fee schedules and participant-level cost projections. Compare to your current 401(k) plan structure and service model. Operational readiness: Assess payroll integration, data validations, and remediation processes. Strong operational hygiene helps avoid compliance pain later. Exit mechanics: Understand how to leave the PEP, spin off your portion of the plan, or change design features if your needs evolve.
The Bottom Line
By enabling PEPs and defining the PPP role, the SECURE Act rebalanced the retirement plan equation for employers that want the advantages of consolidated plan administration without the administrative complexity and fiduciary drag of running a plan alone. PEPs are not a fit for every organization—some will prefer the control of a single-employer plan or the specific community of a MEP—but they are now a mainstream option with growing capabilities. As guidance evolves and market competition sharpens, expect PEPs to deliver even more efficient plan governance and participant value.
Questions and Answers
Q1: How does a PEP reduce an employer’s fiduciary burden? A1: The PEP’s PPP assumes key fiduciary functions—often as 3(16) and through an appointed 3(38) manager—centralizing plan governance, investment selection, and compliance tasks under ERISA, while the employer focuses on selecting/monitoring the PPP and managing payroll data and contributions.
Q2: Can employers customize features in a PEP? A2: Many PEPs offer configurable elements like eligibility, match formulas, auto-enrollment, and loan policies, but choice is typically within a curated menu. Full customization is more common in standalone plans.
Q3: What happens if one participating employer violates compliance rules? A3: Thanks to the SECURE Act’s bad-apple relief, the PEP can isolate or spin off the noncompliant employer, preserving the qualified status of the overall plan and protecting other employers.
Q4: Are PEPs always cheaper than single-employer plans? A4: Not always. While scale can lower costs, pricing depends on plan size, payroll integration, investment lineup, and PPP fees. A side-by-side benchmark is essential.
Q5: Who should consider a PEP versus a MEP? A5: Employers seeking broad eligibility, clear fiduciary delegation, and uniform administration often prefer a PEP. Organizations with strong industry ties or legacy association structures may still find a MEP compelling, depending on governance and cost.
