In 1981 The Johnson Companies created the first 401 (k) plan which allowed employees to contribute to their retirement plan through payroll deduction. So, from an employee perspective this is simple, how much do you want to contribute and where would you like to invest that among plan options. From a company or plan sponsor perspective maybe not so simple. Should I use a Stand-Alone Plan, a MEP’s, PEP’s, PEO’s GOP’s, ARP, or an exchange plan. Let’s take a look at what each plan is and we have provided a chart below with some of the similarities and differences.
Stand Alone Plan (NO Acronym): You as the plan sponsor have the full flexibility to design your plan and investment menu that best fits your plan participants.
Multiple Employer Plans (MEP): This plan is for companies that have some common ownership
Which they will create one plan for all companies to use. This type of plan gives very little flexibility to the individual companies and is controlled by the Lead employer. Open MEPs were established in 2012 and allowed companies which all were with the same plan provider, had the same investment lineup and a similar plan design.
Professional Employer Organization (PEO): To be in a PEO you need to turn over a substantial amount of employee functions to the PEO. Then the PEO gets to decide who will be the service provider and investment lineup, although you usually have some flexibility in plan design.
Pooled Employer Plans (PEPS): This plan is very similar to the open MEP with the exception that you can file a single 5500 for the entire plan and audit requirements are more advantageous and usually will save you money especially if you are just over the 100-employee threshold.
Groups of Plans (GOP’s): Effective January 1, 2022, a GOP is a collection of individual, stand-alone plans that can file a single Form 5500, and plan audit as long as each company uses the same investment menu, trustee, and plan administrator, etc.
Exchange (No Acronym): This plan has the flexibility of a stand-alone plan, with the exception of they all have the same investment lineup and service provider which helps reduce costs.
As a company grows, having the correct retirement plan in place for your company becomes even more important. Once a retirement plan crosses over 100 employees it is subject to an annual audit. As audits can be costly, combining your plan through one of these types listed above can lessen the cost and maybe even lessen the risk for your company. Additionally, when in a shared retirement plan with another company, you as an employer are not liable for the actions of another company who is in the shared retirement plan pool as you.
Plan design, investment selections, and required tax filings each year are also items to consider when selecting the correct retirement plan for your firm:
As you can see this process has become more and more complex. It’s not just picking the right service provider, TPA or Advisor. With the passing of the SECURE Act and the SECURE Act 2.0 halfway through congress make sure you are getting advice from someone who is up to date and informed with industry regulation and change.
* 2021 DWC – The 401 (k) Experts \ P.O. Box 2412267, St Paul, MN 55124
Written by: Justin Hamlin, CFP® and Todd Rohrer, CKP®
These are the opinions of Justin Hamlin and Todd Rohrer and not necessarily those of Cambridge, are for information purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. The strategies discussed herein are not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. However, prior to opening an account, Cambridge will consult with you to determine if your financial objectives are appropriate for investing in the model. You are also provided the opportunity to place reasonable restrictions on the securities held in your account.