SEPs, MEPs and PEPs: Discover the Differences

August 19, 2021 | Blog

Just ask anyone: Uncle Sam and the retirement industry love acronyms. Another was added in December 2020—PEP—which conveniently rhymes with MEP and SEP. The three plan types are 401(k) cousins[1] meaning they share many fundamental similarities and their main differences relate to the administrative models they use.

If you don’t speak fluent tax code or understand complex legal jargon, you are in the right place! We’re going to break down a few of the 401(k) abbreviations you may have heard about lately because once you know what the acronyms stand for, they really start to make sense.

What is a SEP?

A Single Employer Plan (SEP)[2] is, as the name implies, sponsored by a single employer, including any controlled or affiliated group members. This is what most people think of when referencing a traditional 401(k) plan. A SEP is often the plan of choice for large, medium and small businesses as it can be easily customized to meet specific company needs. With a SEP, employers have total control over plan decisions and can work with a retirement plan specialist to help with fiduciary responsibilities.

What is a MEP?

A Multiple Employer Plan (MEP) is a retirement savings plan where multiple employers participate in a single plan. It is sponsored by one entity and adopted by one or more others, but here is the kicker: they need to share a common thread. Participating employers can’t be related tax-wise but they are often members of an association or professional employment organization. While there are various ways to set up a Multiple Employer Plan, to keep it simple, when we use the MEP acronym in this article, we are referring to a closed MEP. Member companies of a closed MEP are not required to file an individual 5500 report, undergo an annual plan audit and acquire individual ERISA bond protection.

What is a PEP?

A Pooled Employer Plan (PEP) is a pooled retirement plan, a type of Multiple Employer Plan that allows two or more unrelated employers to participate in a single plan. It’s the new kid on the block, created by the SECURE Act of 2020 with an effective date of January 1, 2021. A PEP is offered by a group of employers who outsource all administration to yet another acronym—a PPP, or Pooled Plan Provider—a 3(16) fiduciary who establishes and administers the PEP.

The PPP is an important part of the PEP and has three fundamental models:[3]

PPP is a TPA or advisor with no service provider affiliates or proprietary funds in a completely unbundled and unconflicted situation.
PPP selects either affiliates as service providers or proprietary funds in a partially bundled solution.
PPP uses affiliates and proprietary funds in a fully bundled approach.

How Do They Stack Up?

As with any solution, there are advantages and disadvantages; the same is true for selecting a type of 401(k) plan. There are so many variable options with each plan type, so here are a few key points to consider:

Customization: SEPs offer the highest level of customization as each employer can build a plan to meet their specific goals. By contrast, MEPs and PEPs are built with the best interests of many in mind so individual employers may be limited on the elements they can customize.

Time Commitment: One of the key benefits associated with MEPs and PEPs is the ability to outsource administrative duties. This same sentiment is true within a SEP when you select specialized service providers committed to taking on fiduciary duties.

Responsibility: No matter what, if you offer a retirement plan to your employees, you will carry some level of fiduciary responsibility. All 401(k)s plans allow you to offload plan operations and investment decisions to 3(16) Plan Administrator and a 3(38) Discretionary Advisor; the main difference with MEPs and PEPs is that both are determined by the plan; whereas, with a SEP, you have the ability to select all service providers.

Tenure: SEPs and MEPs have been around for a long time and are known entities. PEPs are still fresh out of the box and their effectiveness has yet to be determined.

Have questions? Call us today or schedule a virtual conversation to discuss which plan type could be best for your business.

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.

[1] A MEP can also be a defined benefit plan.

[2] SEP can also refer to a Simplified Employer Plan, an IRA-based plan for self-employed individuals or small business owners with a few employees.

[3] Moore, Rebecca. “The PEP Opportunity.” Plansponsor.com. September 2, 2020.

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