the pros and cons of peps

Combined employer plans (PEPs) have gained popularity as a practical solution for smaller businesses. But as adoption grows, larger and more sophisticated retirement plan sponsors are beginning to question whether a PEP might work, too. The answer, however, is complicated and counselors should know why before tackling the issue.

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Why were PEPs created in the first place?

A PEP is a single defined contribution plan shared by several unrelated employers. Instead of each company sponsoring and administering their own 401(k), they participate together in a plan managed by a joint plan provider (PPP), which serves as the plan’s fiduciary and administrator, coordinating compliance, recordkeeping, government filings, participant notices, and all other functions necessary to operate the plan. The underlying mechanics are the same as a traditional 401(k). Contribution limits, fiscal treatment and participant rights have not changed.

The case of PEP, The SAFE Act of 2019 starts with a simple premise: Most of the things that make it difficult for small employers to offer a retirement plan are issues of scale. A 401(k) isn’t impossible for a smaller business owner to manage independently, but doing it right takes time, experience, and resources. By bringing multiple employers together under one plan led by a professional administrator, PEPs offer the kind of administrative infrastructure and access to institutional pricing that was previously available to large plans.

Whether employers lack the scale, internal expertise or administrative bandwidth to effectively support a self-employed 401(k), 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 trust, compliance and operational complexity that has historically made plan protection resource-intensive, enabling small and medium-sized businesses to provide benefits competitive with their larger counterparts and improving retirement security for nearly half of all Americans who work for them.

Where the market is

according to A study by Cerulli AssociatesMore than 50,000 employers have now adopted a PEP. At the end of 2024, the latest year for which data is available, there were about $21 billion in assets in more than 339 PEPs. To encourage wider adoption of PEPs, the US Department of Labor has considered safeguards for employers who follow the steps outlined in selecting a PPP.

recently, The PEP model has also been extended to 403(b) plans for nonprofit organizations, a segment that has historically had limited access to quality retirement infrastructure. PEPs are still largely driven by the employers who were designed for them: small businesses and organizations that previously did not offer a retirement savings plan, for whom a unified structure represents a real first step to competitive benefits.

Interest among medium and large employers is growing, but remains largely in the consideration phase. Behind these conversations is a familiar set of pressures: rising litigation concerns, the grind of plan administration, and a growing belief that a structure that delivers that value to smaller employers might have something to offer on a larger scale.

Why large employers want a piece of PEP

Large employers considering a PEP it can be entered through the promise of administrative support. But most don’t handle audits, Form 5500 filings, and compliance today. They already rely on third-party administrators, auditors, ERISA advisors, recordkeepers and investment advisors to handle many of the operational burdens associated with running a retirement plan.

For many large employers, therefore, the biggest draw is not administrative convenience. It is believed that a PEP provides significant protection from increased exposure to fiduciary litigation. ERISA litigation has increased and incorporating a PPP as a named fiduciary can be a structural way to reduce exposure. This perception encourages real conversations in large organizations and is not entirely wrong. A PEP reduces, but does not eliminate, the fiduciary responsibilities of the adopting employer.

However, the benefits that attract large employers to PEPs also come with significant trade-offs.

What you leave in the pool

PEPs can preserve employer choices in important areas such as eligibility, matching contributions, vesting schedules, and automatic enrollment. But these options are within the structure established by the PPP, not within a completely independent plan. For employers whose plans reflect years of personalized governance, change authority and operational decision-making, this is no small concession. As part of a PEP, many of these responsibilities shift to the provider.

Investment control is equally limited. Fund lists are standardized across employers and decisions about replacing underperforming investments rest with the PPP. An entrepreneur who has spent years building an investment governance process cannot take that structure to the pool.

For some employers, that trade-off may be worth it. But a PEP is not the only way to reduce the burden of trust. 3(38) An investment adviser may assume discretionary responsibility for the plan’s investments without the employer relinquishing plan design authority or broader governmental control. Large employers also typically already have the scale of assets to independently negotiate competitive fees, reducing some of the economies of scale that make PEPs attractive to smaller employers.

The loss of governance tends to surprise entrepreneurs the most. Plan changes, fund changes, and operational decisions are ultimately made through PPP among all employers, regardless of plan size.

Why big employers are still on the fiduciary hook

The promise of reduced fiduciary liability is one of the most attractive aspects of a PEP. The PPP becomes the designated fiduciary, the compliance schedule is shifted elsewhere, and the governance burden appears lighter.

But the fiduciary responsibility does not disappear. PPP itself concentrates on the selection and control decision. A PEP can reduce some of the burden of trust, but employers still retain an obligation to carefully evaluate the provider and monitor the relationship over time.

Safe harbor rules can ultimately provide employers with clearer guidance on supplier selection and monitoring. But they will not eliminate the underlying bond obligation itself.

A control account

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

But joining a PEP is still a fiduciary decision, not leaving one. Employers don’t just outsource 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, this compromise can be easy. For adults and more sophisticated plan sponsors, the calculation is more complicated.