While small employers will certainly benefit from the added focus that will come from outsourcing their retirement plan, there are several other types of businesses who will find PEPs to be a superior alternative.

U.S. subsidiaries of a global company

Global companies face unique challenges within each country they operate, resulting in many companies outsourcing non-core functions like legal and accounting to local experts. Yet, an international parent company of a U.S. subsidiary has the added burden of dealing with the unique regulatory, administrative, and fiduciary requirements of the American retirement system.

A PEP offers these global companies with U.S subsidiaries a way to focus on the reason why they are doing business and employing workers in the U.S., leaving the plan sponsor role of their employees' U.S retirement plan to the experts.

Private equity-owned companies

Flexibility and focus are two important characteristics of successful private equity investments. Whether a private equity firm was bought into a company to help foster growth or is looking for ways to improve flagging operations, managing a retirement plan may be a distraction and become counterproductive to the goals of the investment in the company.

By adopting a PEP, both company management and the parent private equity firm are freed from the administrative responsibilities and fiduciary risks of being a plan sponsor. In fact, if done right, the PEP's Pooled Plan Provider can serve as a partner to the private equity firm, helping to facilitate plan mergers into the PEP and allow the acquisition team to focus on the many other details of bringing a new company into their portfolio.

Franchisors and franchisees

Tightness has returned to the labor market, particularly for restaurant franchises that have historically relied on lower-cost, part-time employees, and managers. Many franchisors know that their franchisees will benefit from offering a retirement plan, but struggle to find the best way to facilitate a solution.

PEPs offer a balance by providing a flexible solution that can address the frequent transactions and disparate needs of a large base of independent franchise owners. PEPs also offer franchisors and franchisees flexible retirement plan offerings that can survive franchisee transactions, while still allowing independent franchise owners to stay focused on running their business.

Less work for employers, more work for providers and auditors

In most retirement plans, the employer generally holds the plan sponsor role, but that's not the case for a PEP. Pooled Plan Providers (PPPs) serve as the primary fiduciary for selecting services of plan operations. The PPP is also typically the fiduciary plan administrator, commonly known as a 3(16) fiduciary. 

Moving forward, PPPs will likely handle investments, investment income, benefits payments, distribution of loans, expenses, and contribution processing. Meanwhile, participating employers will focus on managing payroll and, depending upon the services offered in the PEP, possibly support the employees' contributions, eligibility, and/or census data.

While there are many benefits that PEPs offer various types of businesses, the ability to shift responsibilities to the PPP is accompanied by an employer's responsibility to perform due diligence on the PPP. There are several considerations and requirements that should be part of this due diligence, including the PPP's experience and expertise in handling the PEP's benefit plan audits. For PEPs, an audit is required when a PEP has 1,000 or more total participants or when a PEP includes one or more employers with over 100 participants. With any successful PEP likely to quickly exceed these levels, what are some of the challenges of PEP audits that PPPs and their auditors should be aware of? 

Auditing considerations: Internal control

There are various items for a PPP to consider when preparing for an audit. In a PEP, there are unrelated employers grouped together within the plan; therefore, auditing will be more complicated and may vary by each employer. With this in mind, auditors will need to have a good grasp of the different employers within the PEP including each of their sizes, infrastructures, and industries. 

Taking it one step further, auditors will also need to understand the controls at each service provider, asking questions around whether or not they have a System and Organization Controls Report (SOC 1). If a SOC doesn't exist, auditors must then determine how to gain comfort over the PPPs internal controls. Although this a relatively new concept and PPPs may not have considered it until recently, discussing it early in the planning process will ensure time savings down the road. 

Risk assessment and special consideration for auditors

After reviewing the internal control and planning considerations, auditors will then want to turn their attention towards assessing risk. For example, with multiple employers in a PEP, processing will likely vary when it comes to remittance of contributions. 

So, how do PPPs gain comfort that each participating employer is in compliance with the Department of Labor (DOL) regulation regarding timely remittance? Are there late or unremitted contributions made to the PEP? Auditors will need to ask the right questions when it comes to assessing risk with PEPs.

Other considerations for auditors to keep in mind range from mergers or spin-off of assets, to expenses and data collection. Auditors will have to pay careful attention to the completeness of contributions and census data to avoid inconsistencies across the board. And when onboarding new participating employers into a PEP, auditors will need to determine if they were properly set up and rolled into the plan. Further, when working with multiple different participating employers, there may be delays in the receipt of deliverables and auditors will need to plan accordingly to ensure this does not set back deadlines.

Preparing for financial reporting

Similar to preparing for an audit, PEPs require special considerations for financial reporting. Plan reporting will likely present many nuances, including disclosure needed when employers in a PEP select different plan provisions. 

The future of retirement planning

The recent launch of PEPs is expected to greatly disrupt the once sleepy retirement industry. Legacy approaches to supporting traditional single employer plans means significant administrative and fiduciary burdens on business leaders, their staff, and auditors. 

As businesses explore the opportunities of PEPs, the ability to shed plan sponsor responsibilities and put the focus back on the business will be of equal or greater importance as the cost benefits and other features relative to traditional single employer plans. 

Stephen J. Carl, J.D. is the CEO, High Probability Advisors and Jeffrey S. Coons, Ph.D. is the Chief Risk Officer, High Probability Advisors. They can be reached at [email protected] and [email protected]. Nancy Cox is a Partner at The Bonadio Group specializing in financial statement auditing and can be reached at [email protected]. For more information, visit www.highprobabilityadvisors.com and www.bonadio.com.