The Department of Labor (DOL) is asking for public input on how to support small businesses that want to adopt pooled employer plans (PEPs), a signal that regulators see these arrangements as one way to help close the coverage gap. PEPs have gained significant traction since they first became effective in 2021.
PEPs expand on the MEP model by addressing two features that previously complicated participation in these plans. First, they eliminate the “commonality” requirement, which stipulates that employers must share an industry or location. And second, they sidestep the “one bad apple” rule, where one employer’s mistake could jeopardize the qualified status of the entire plan. PEPs are required to be administered by a pooled plan provider, or PPP.
These plans are showing signs of growth. Aon’s PEP, for example, has more than doubled in assets over the past two years and now manages over $5 billion for 130 employers and 100,000 participants. According to the DOL, per-participant costs in the three largest PEPs ranged from 0.23% to 0.42% in 2023, compared with Morningstar’s data showing the median cost in small stand-alone plans at 0.84%.
One of the attractive benefits of a PEP is that the participating employers generally avoid the requirement to undergo their own standalone ERISA plan audit, since the PEP is audited at the aggregated plan level. This can significantly reduce administrative burden and audit‑related expenses, particularly for organizations that would otherwise be subject to the “large plan” audit threshold (more than 100 participant balances). For many employers, this shared audit structure is a meaningful operational and cost advantage when compared to maintaining an individual plan.
Limitations and Considerations
Nonetheless, PEP adoption by small businesses has yet to become widespread, partly due to a lack of education by advisors and employers. However, there can be legitimate limitations that deter employers as well. Standardized plan designs may leave less room for customization to meet the unique needs of individual workforces. Employers seeking flexibility with some plan design features may find many PEPs too rigid.
Employers also give up a measure of governance and control, since fiduciary and administrative decisions are more centralized within the pooled arrangement. This differs from traditional plans, where sponsors can have greater flexibility to change out a recordkeeper, investment menu, or a TPA that’s not a good fit. And because the PEP model is still relatively new, the regulatory environment remains fluid. Guidance from the DOL and other agencies will continue to evolve, and plan sponsors may encounter changes along the way.
PEPs are not universal or a complete solution. According to the Federal Register, “under federal law, employers joining a PEP are legally responsible as fiduciaries for the proper selection of investment options for their employees unless the pooled plan provider hires an investment professional to act as a fiduciary with respect to investment selection.” Sponsors also have a duty to prudently select and monitor the PPP and other providers/fees.
Takeaways for Plan Sponsors
As PEPs continue to mature, they represent one of several viable pathways for employers seeking to strengthen their retirement plan oversight. A PEP’s standardized infrastructure, pooled scale, and consolidated fiduciary framework can offer meaningful advantages—particularly for organizations looking to outsource more responsibility or streamline administration. At the same time, employers can also ease fiduciary burdens and reduce costs within a traditional stand‑alone plan through options such as hiring a 3(38) investment manager, adding a 3(16) plan administrator, or incorporating CITs into the investment lineup. These strategies may deliver many of the same efficiencies without joining a pooled arrangement. Still, only a PEP provides the fully aggregated fiduciary structure, unified governance model, and economies of scale that accompany participation in a larger, professionally overseen plan.
Ultimately, both approaches can be effective—what matters most is aligning the structure with the organization’s objectives, workforce needs, and desired level of fiduciary and administrative oversight.
