- The SECURE Act 1.0 gave us Pooled Employer Plans, PEPs, for qualified plans.
- SECURE Act 2.0—effective for plan years beginning after December 31, 2022—extends PEPs and MEPs to 403(b) plans.
- While the legal effective date is already here, I haven’t yet seen any 403(b) MEPs or PEPs in the marketplace. So, the ”practical effective date” may be the 2024 plan year.
The President signed the Consolidated Appropriations Act, which included SECURE Act 2.0, on December 29, 2022.
SECURE Act 2.0 has over 90 provisions, some major and some minor; some mandatory and some optional; some retroactively effective and some that won’t be effective for years to come. One difference between the SECURE Act 2.0 and previous retirement plan laws is that many of 2.0’s provisions are optional…that is, plan sponsors are not required to adopt the provisions, but can adopt them if they decide that the change will help their plans and participants. This series discusses the provisions that are likely to be the most impactful, either as options or as required changes.
This article discusses the continuing extension of 401(k) concepts to 403(b) plans, specifically the SECURE Act 2.0 provisions for 403(b) PEPs and MEPs. This probably reflects the growing awareness of the higher costs in the 403(b) market, especially for smaller and midsized plans.
The Senate Finance Committee’s summary of the provision is:
Section 106 [of the Act], Multiple employer 403(b) plans. Multiple employer plans (“MEPs”) provide an opportunity for small employers to band together to obtain more favorable retirement plan investment results and more efficient and less expensive management services. The Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”) made MEPs more attractive by eliminating outdated barriers to the use of MEPs and improving the quality of MEP service providers. Section 106 allows 403(b) plans, which are generally sponsored by charities, educational institutions, and non-profits, to participate in MEPs and PEPs, including relief from the one bad apple rule so that the violations of one employer do not affect the tax treatment of employees of compliant employers. Section 106 is effective for plan years beginning after December 31, 2022.
These new 403(b) MEPs and PEPs could provide opportunities for schools, hospitals and tax-exempt entities to offer 403(b)s that are similar to 401(k)s and that, through the combining of assets of the adopting employers, offer lower cost investments (e.g., institutional share classes) and more transparent expenses (perhaps with fewer conflicts of interest) than the 403(b) plans sponsored by some smaller entities. Time will tell.
For private sector 403(b) plans, the MEP and PEP structures will enable the adopting entities to transfer the ERISA fiduciary responsibility for investments to the managers of the plans (or to 3(38) investment managers hired to select those investments). In addition, the 3(16) administrative fiduciary responsibility can be transferred to the fiduciaries of those pooled plans.
While government plans are not subject to ERISA, it may still be a relief to have professional advisers selecting the investments and retirement plan professionals making the administrative decisions.
To facilitate the adoption of 403(b) MEPs and PEPs, the SECURE Act 2.0 directs the Secretary of the Treasury to publish model plan language for these arrangements.
While this provision is already effective (for plan years beginning after December 31, 2022), it may not be practically available. 403(b) recordkeepers are undoubtedly working on the products and services, for example, recordkeeping software, websites, communication materials. However, I have not yet seen an offering in the marketplace.
While 403(b) MEPs and PEPs may be slow in developing, they do have real potential. For example, and much like small for profit companies, why should small schools be burdened with the responsibility of establishing and operating plans, when a knowledgeable provider can do that work for their plan? And that may be especially true of the PEP version of 403(b)s, where the pooled plan provider can take on fiduciary responsibility for both investments and administration by appointing a 3(38) investment manager and by serving as the 3(16) administrative fiduciary.
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