Brand new to the 401(k) marketplace as of January 1 2021, Pooled Employer Plans (commonly referred to as PEPs) are made possible thanks to the SECURE Act. PEPs allow unrelated employers to “pool” together, along with other employers (traditionally small businesses) in order to participate in a retirement plan for their employees.
PEPs differ from a similar offering called MEPs, Multiple Employer Plans, in that there is no requirement for commonalities between the small businesses participating in the pool.
Are PEPs right for your small business? Or would you prefer to work with a 401(k) provider (like Rebalance’s Better K) that is dedicated to ensuring that you provide your employees with the best retirement benefits?
To learn more about PEPs in order to make an educated decision as to whether they are right for you, I recommend that you read this article by 401(k) Specialist, below.
How Deep is the 401k PEP Pool?
By Brian Anderson
There’s an old saying in the insurance business: “Life insurance is sold, not bought.”
And it can be a tough sell at that, with many consumers not understanding it, thinking they don’t need it or can’t afford it. These objections have long frustrated life insurance agents.
Will a brand-new type of retirement plan, the Pooled Employer Plan (PEP), made possible by the SECURE Act, bring similar frustration to 401(k)-focused advisors by also having to be sold, not bought?
Maybe …particularly when pitching them to smaller employers or those without an existing retirement plan.
A 2020 Cerulli Associates report found at least one quarter of 401(k) plan sponsors are at least somewhat interested in joining a PEP, but more than one-third (36%) of small 401(k) plan sponsors (with less than $5 million in plan assets) expressed “no opinion” on the topic.
“This may be the sign of a knowledge gap related to PEPs in the lower end of the market,” said Shawn O’Brien, a senior analyst with Cerulli. “When addressing smaller employers, more educational discussions related to the costs and benefits of PEPs may be in order.”
These new 401(k) structures, which became available as of Jan. 1, 2021, allow unrelated employers to cut red tape and costs by “pooling together” to participate in a retirement plan without the old “common nexus” requirement that was standard for traditionally underused Multiple Employer Plans (MEPs). So new, in fact, that they are still largely an unknown in many respects.
How many small- and medium-sized businesses, recordkeepers, asset managers, third-party administrators (TPAs) and intermediaries are ready to jump into the PEP pool, especially when they don’t yet know how deep it is?
While a Registered Investment Adviser (RIA) can become a Pooled Plan Provider, early indications are that most—with PPP duties not among their core competencies—will see too many risks and drawbacks, and that TPAs and recordkeepers are more likely to jump in first as PPPs.
“Providers considering the role of PPP need to be aware of the 3(16) fiduciary responsibilities involved,” O’Brien added. “Recordkeepers and TPAs are seemingly a natural fit for this role.”
Many have already jumped in, including Aon, which launched its PEP on Day 1—Jan. 1, 2021. Aon, in a 2020 whitepaper titled “Pooled Employer Plans: The Start of a New Era for Retirement Plans,” predicts that by 2031, roughly half of all U.S. plan sponsors will have transitioned to PEPs.
“It is quite possible there will be very few stand-alone single-employer defined contribution plans in 20 years—all but replaced by PEPs,” the report states. “Aon believes the PEP can help employers deliver better retirement outcomes to their employees with lower fees, less staff time and involvement, and better fiduciary governance (i.e., less fiduciary risk)—allowing the employer to better focus their energy on running their business and taking care of their people.”
Such statements show how much some in the industry believe in the potential this new “pool” has to significantly transform the employer-sponsored retirement plan market.
“The demand is increasing, and so is the interest,” Wendy Von Wald, Fiduciary Product Manager for Travelers, told 401(k) Specialist. “We’ve had more discussions with our agents and brokers who are asking about fiduciary liability coverage for an employer interested in joining a PEP. We’ve also had brokers and agents submitting requests to cover newly formed PEP plans.”
The New Kid In Town
Pooled Employers Plans were born out of Congressional efforts to make employer-sponsored retirement plans available to more workers to help solve the retirement savings crisis. The SECURE Act, signed into law at the end of 2019, essentially created PEPs to address/solve a pair of longstanding issues that kept Multiple Employer Plans from achieving widespread adoption: the “one bad apple” rule and “common nexus” requirement.
The SECURE Act removed these regulatory roadblocks, with retirement reform backers hoping that PEPs—without these problems—can gain mainstream adoption and help more Americans gain access to a retirement plan.
“The intentions behind this addition to the Employee Retirement Income Security Act (ERISA) are good, so we’ll have to see how everything plays out,” Von Wald said.
“The lack of employer oversight of PEPs, as noted by recent Department of Labor comments, might give employers something else to consider when choosing to join a plan. The concern is that some small employers might not look into everything before making the decision to join a PEP, or in choosing which one to join.”
While some PEP critics have voiced concern that they could lead to some providers “churning” existing clients from perfectly sound 401(k)s into a shiny new vehicle that may or may not be better for their participants, there are definitely some things about them that figure to attract employers currently sponsoring their own plan.
For one, removing administrative burdens.
A PEP means only one Form 5500 filing for the entire plan instead of each employer, and only one plan audit. Many other administrative requirements are done just once for the plan as well, which is purposeful on the part of regulators with a goal of reducing overall costs of 401(k) plans for employers.
“Lower costs are appealing and available to employers because the PEP would have incurred the expenses needed to set the plan up, such as the administrative tasks involved that now wouldn’t fall on the company,” Von Wald said. “Another way a company’s costs can be reduced by joining a PEP is the lower fees for things like investing and recordkeeping with a larger plan when compared to something smaller.
By pooling together, small plans can finally enjoy the same economy of scale larger defined contribution plans have always enjoyed.
Since the PEP has already been established, Von Wald noted an employer wanting to join wouldn’t have to incur the legal costs and other fees that come from establishing a plan, so there is a lower barrier to entry. The PEP provider has already selected the investment advisor, recordkeeper and funds being offered.
There would also be a reduction in fiduciary liability if an employer joins a PEP because the provider will carry the liability for the selection and monitoring of the individual funds. “However, the employer would still carry liability for the selection and monitoring of the PEP plan and provider,” Von Wald said. “This is not as clear-cut as it might seem, leaving some employers to question whether they are shedding as much liability as they originally thought when considering a PEP.”
Pooled Plan Providers must register with the Secretary of Labor and the Secretary of the Treasury before they begin operations as a PPP, and are then statutorily required to serve as the 3(16) Administrative Fiduciary.
In addition to previously mentioned Aon, Rochester, New York-based Paychex, Inc. and Des Moines, Iowa-based Principal Financial are among the early recordkeepers wanting to test the PPP waters.
“Our new PEP will provide business owners with a cost-effective plan option that relieves the compliance and administration burdens of a traditional 401(k) plan, giving their employees access to a robust retirement plan benefit and allowing them to confidently prepare for their financial future,” said Tom Hammond, Paychex Vice President of Corporate Strategy and Product Management, in announcing the move last December.
Paychex aligned with two other retirement industry leaders to provide services for the PEP offering. Mesirow Financial serves as the 3(38)-investment manager of the PEP and Mid Atlantic Trust Company serves as the Trustee.
“Over the last five years, we have seen a shift from 3(21) to 3(38) fiduciary services, particularly at the smaller end of the retirement plan market. These small and mid-size employers appear to be signaling an openness to fully outsourcing fiduciary duties and will likely be interested in the fiduciary support afforded in a PEP,” said Mike Annin, Senior Managing Director of Fiduciary Solutions at Mesirow Financial.
Meanwhile, Principal is teaming up with National Benefit Services as the TPA and Wilshire as the investment fiduciary to introduce a PEP called Principal EASE. It is designed for employer plans up to $10 million in assets under management.
“By shifting liability to designated fiduciaries with specific knowledge and skills, employers benefit from investment management as well as reduced administrative tasks and risks,” said Jerry Patterson, Senior Vice President of Retirement and Income Solutions at Principal.
But that doesn’t mean employers are in the clear by joining a PEP. Plans can be set up differently, so employers need to pay close attention, Von Wald said. The provider might not remove as much of the administrative burden as initially thought by the employer, and the company might have administrative exposure for tasks such as transferring PEP contributions in a timely manner and filing forms with the Internal Revenue Service and the Department of Labor.
“With the rise in excessive fee lawsuits and how costly those can be, it’s important that companies do their due diligence,” Von Wald said. “One smart step is considering fiduciary liability insurance, which can cover the costs of defending an excessive fee lawsuit and protects the company, its directors and officers and any administrators serving in a fiduciary role.”
What’s In It For Advisors
As previously mentioned, RIAs and broker-dealers are less likely to take on the PPP role, at least at the outset and under current guidance from the Department of Labor.
The biggest reason is that serving as both the Pooled Plan Provider and an investment advisor to the plan may be a prohibited transaction.
In a Dec. 30, 2020, white paper on the topic from Kitces.com, “The New Pooled Employer 401(k) Plan and The Hazards of Advisor-Led PEPs,” author Jeffrey Levine writes:
“Absent some sort of Prohibited Transaction Exemption, it would appear as though an RIA serving as a Pooled Plan Provider may very well be prohibited from hiring themselves as the investment advisor to the plan in order to manage the plan assets for an AUM fee (which is presumably the primary reason that an RIA would want to serve as a Pooled Plan Provider in the first place!).”
Internal Revenue Code Section 4975(c) (1) disallows a plan fiduciary from dealing with the income or assets of a plan for their own interest, or from receiving compensation from the plan in connection with transactions involving the income or assets of the plan.
Even if the DOL eventually provides favorable guidance, Levine says the fact that the PPP is statutorily required to serve as the 3(16) Administrative Fiduciary is another reason RIAs may want to steer clear from registering themselves as a Pooled Plan Provider.
So where does that leave 401(k)-focused advisors when it comes to PEPs?
Given the various business, regulatory, operational and other challenges, one has to wonder whether the vast majority of RIAs won’t be better off sticking with what is essentially the status quo, Levine wrote in the Kitces.com white paper, “which would mean letting the administrators be the Pooled Plan Providers and administrate, while the RIAs continue to focus on investment advice and participant education—a system that has worked so well, for so many, for so long.”
This article originally appeared in 401(k) Specialist Mag on April 19, 2021