In recent years, small businesses across the U.S. have gained access to additional retirement plan options, notably pooled employer plans and state-facilitated plans. Oregon kicked off the wave of state-facilitated retirement plans in 2017, and pooled employer plans came on the scene in 2021, all catering to small businesses.  

But which plan is right for a small business starting a new plan? The devil, as always, is in the details.  

Factors such as the size of the business, the fees and time managers expect to put into the plan and the goals they have for their participants all play a factor, according to experts. The difference, at the highest level, is that while state plans can be a great way to get people saving, the PEP structure allows for more intricate plan designs and options for participants in the long run—but those bells and whistles, of course, will come at a higher cost.  

State-Facilitated Plans 

According to Georgetown University’s Center for Retirement Research, 19 states either have state-facilitated retirement savings programs in place or have approved programs preparing to launch. Meanwhile, policymakers in many more are considering legislation to implement them; only Alabama and South Dakota have not considered retirement savings legislation since 2012. The programs created by state legislation are primarily aimed at small businesses and companies currently without an in-house retirement plan.  

State-run retirement plans, typically individual retirement accounts, have been touted as a straightforward, no-cost solution for employers looking to offer a retirement plan without shouldering significant administrative responsibilities, says Phil Senderowitz, a managing director at Strategic Retirement Partners. He explains that these plans are appealing for businesses with limited resources, since they generally come without fees.  

“State-run plans don’t cost anything,” he notes, which makes them an economical choice for very small businesses. Additionally, states incentivize participation by keeping employee contributions low, generally at 3% to 5% of earnings. 

However, state-run IRAs lack the flexibility that many employers desire when setting up a retirement plan to reward and retain their employees. According to Senderowitz, the limitations on customization mean that “just allowing [employees] to put their own money into a plan isn’t really a big carrot.” In particular, most state-run plans do not permit employer matches, a feature often used by companies to enhance employee retention and satisfaction. 

Oregon, Illinois and California all progressed from pilot programs to enactment by the end of 2019, but no other states even started pilot programs before late 2021, so state-facilitated savings programs are, as a whole, in their very early stages. 

One side effect commonly seen so far, however, is that business uptake of all retirement savings programs, not only those set up by the states, has increased. Michael Salerno, founder and CEO of the National Professional Planning Group, says while state-facilitated programs might work well for microbusinesses with only a few employees, they are often inadequate for companies with more complex needs. 

“The types of businesses that are going to want to gravitate towards a PEP versus a state-run plan are those that want to have a lesser role in the fiduciary monitoring and running of their plan,” he says. 

The Case for PEPs 

For businesses seeking a more robust retirement plan, PEPs provide several distinct advantages over state-run IRAs. PEPs, established under the Setting Every Community Up for Retirement Enhancement Act of 2019, allow multiple employers to join together in a single retirement plan, pooling administrative resources and costs.  

According to Salerno, PEPs “allow a much greater outsource of administrative function and liability” and provide “additional administrative efficiencies that have not typically been seen in the state-run plans.” 

One of the most significant benefits of PEPs is the potential for a much larger variety of investment choices. Salerno points out that PEPs can also have financial wellness and managed account availability, often missing in state-run plans.  

Holly Verdeyen, a partner in and U.S. defined contribution leader at Mercer, says state mandates raise awareness and demand for pooled employer plans, which strike a better balance for employers aiming to offer their employees a comprehensive and cost-effective retirement solution without overburdening their internal resources.  

“They present a compelling alternative to state-run plans, as pooled employer plans are generally more sophisticated and can potentially reduce investment fees through economies of scale,” says Verdeyen. “Additionally, employer incentives to offer a retirement saving plan have increased with the SECURE 2.0 legislation.” 

Senderowitz highlights another key difference: federal tax credits available to employers who start a PEP. Employers initiating a PEP for the first time may qualify for tax credits that offset startup costs and encourage contributions, including matching contributions. For example, a small business could receive tax credits that allow it to offer up to $1,000 per employee in matching funds over the first two years, a bonus state-run plans generally do not support. 

Cost Comparison 

The cost factor is a crucial consideration for small businesses evaluating retirement plan options. While state-run plans are generally free for employers, PEPs cost. Senderowitz explains that, for some businesses, the expense of managing their own 401(k) plan may be comparable to participating in a PEP due to the pooling of administrative resources and shared costs. In some cases, employers may find they are paying about the same amount for a more versatile plan with additional perks. 

But Senderowitz also stresses that, for many companies, the investment in a PEP translates to less time, effort and responsibility than would be required to manage an independent 401(k). “An employer would likely save in terms of time and energy,” he says, as PEP administrators handle many of the fiduciary responsibilities, reducing liability for the business owner. 

Additionally, while a PEP may cost more initially, Senderowitz points out that tax credits for all defined contribution startup plans can make them effectively free for the first three years, allowing businesses to grow their plans to a point of self-sufficiency before incurring significant costs. 

Advisers’ Role in Optimizing Retirement Plans 

Adviser Salerno underscores the role of knowledgeable consultants in helping businesses make informed choices between a state-run plan and a PEP, based on the goals and needs of their employees.  

“The right adviser is really important at all levels, [from] the employer level all the way through to participating employees,” he says. “That adviser would be intricate, sometimes, in helping each participant create an allocation of risk. I see the best advisers out there not only building a strong plan, but also building a strong peace-of-mind plan.” 

An adviser’s expertise becomes especially valuable in PEPs, because the expanded investment choices may require a tailored approach to meet the needs of different employees. Salerno explains that a proactive adviser can understand a client’s risk tolerance and provide guidance to keep employees on track during market fluctuations.  

“People with access to workplace defined contribution plans typically begin saving for retirement earlier and saving more,” says Verdeyen. “However, one-third of private industry workers in the U.S. lack access to employer-sponsored retirement plans. Both state-run plans and pooled employer plans enhance the accessibility of an affordable retirement plan for small businesses and traditionally under-served communities, thereby potentially promoting increased retirement savings.”  

For businesses with at least 20 employees, PEPs offer a comprehensive, customizable solution for retirement planning that state-run programs may struggle to match. As Senderowitz observes, some employers may prefer to have “a little bit of say in how things are set up,” even if it means taking on a slightly higher cost and administrative burden. 

State-run plans, while cost-effective and accessible, may not align with companies aiming to provide a more substantial benefit for employees, particularly in terms of employer matching. 

Meanwhile, businesses with fewer employees may find the simplicity and no-cost nature of state-run IRAs appealing. Ultimately, the decision hinges on each employer’s needs and goals, and having a trusted adviser to guide them through these options can make all the difference.