PEP-ing up employers’ retirement plan options: A few things to know

Pooled employer plans (PEPs) were created to give small business employees access to a defined contribution retirement plan, with the promise of easing administrative pain points for small business owners.  Providers are stepping forward to offer them, advisors are talking about them, and employers are curious about them.

Still, many questions remain about PEPs over a year after their creation in the SECURE Act and months after the go-ahead date of Jan. 1, 2021. We asked Wendy Von Wald, Fiduciary Product Manager at Travelers, about some PEP misconceptions, as well as considerations in working with PEPs.

BenefitsPRO: What is your take on whether plan sponsors are interested enough in pooled employer plans (PEPs) to offer one?

Wendy Von Wald: Based on the number of PEPs being formed, it appears there is sufficient interest.

This is supported by the U.S. Department of Labor announcing that it had identified “roughly 3,200 unique entities” that would initially register as pooled employer plan providers.

While employers already have ways to offer employees opportunities to save for retirement, there are advantages to PEPs that may make them very popular. They can provide employers with a less expensive way to offer retirement savings vehicles while mitigating some exposure to liability under the Employee Retirement Income Security Act (ERISA).

However, moving to these plans may take a little time, as employers analyze the pros and cons compared with their existing offerings. Also, employees may voice concerns about moving from plans they’ve grown comfortable with.

There does appear to be a chance for growth in this space. Only 46% of individuals working for companies with fewer than 50 employees have access to defined contribution plans sponsored by their employers, according to a recent Department of Labor compensation study.

How much do most plan sponsors know about PEPs?

PEPs have generated a great deal of media coverage in the industry since becoming available on Jan. 1. That’s a positive. But these plans can be complex, so it might be difficult to gain a complete understanding of a particular PEP without learning about its details and benefits.

There are a few questions for plan sponsors to consider before making any decisions on whether to join a PEP or which one to select.

For instance, what is the experience of all service providers? How are investment options selected and monitored? Is 3(38) fiduciary status – which refers to an investment manager responsible for the plan’s day-to-day decisions and investments – assumed by the investment advisor? Does a participating employer have the ability to customize its account? How are the various parties compensated?

Are there misconceptions that need to be cleared up?

Employers might think that joining a PEP will entirely remove their fiduciary liability. It does not. The Department of Labor’s final rule clearly states that employers retain liability for selection and monitoring of the plan and its service providers. There will likely be some administrative burden left with the employer, even if it’s reduced by participation in this type of plan.

For those new to the idea of PEPs, what is important to know about them? Advantages? Caveats?

One advantage may be reduced employer’s fiduciary liability on some level, but it also locks the employer into the structure that the PEP provider establishes, likely with limited ability to change that. There may be constrained ability to seek recovery from the provider, but that depends on the contract.

Overall, these plans are structured differently. For instance, some may have a take-it-or-leave-it investment lineup, while others may offer flexibility.

How can an organization decide if a PEP is right for it?

f a retirement plan isn’t already established, the organization first will need to consider whether to offer one to its employees. If a plan doesn’t exist, the employer can consider retirement savings vehicles such as IRAs or a sole-sponsored 401(k), a closed multiple-employer plan (MEP) or a PEP. Each option has its pros and cons, but a consideration of each can be an important step in the process of moving forward.

If the employer decides a PEP is the best option, then it’s like any other business relationship. There needs to be a comfort level, based on due diligence and research on the part of the employer, with the provider, the plan’s investment advisor and other service providers, and experience with the parties involved and potential cost savings. But there might be some loss of control in the selection of the funds and the investment advisor, which should be considered.

What might attract advisors and recordkeepers to PEPs?

Advisors and recordkeepers might be attracted to these plans as a way to grow their client base – by bringing in employers who have not previously offered retirement savings to their employees. It also might make it more burdensome for clients in the PEP to leave, because leaving means establishing a sole-sponsored plan and all that goes with it.

The biggest hurdle for advisors who are considering taking on the role of a PEP provider is the restriction on prohibited transactions from the Internal Revenue Code, which bars a plan fiduciary from acts “whereby he deals with the income or assets of a plan in his own interests or for his own account.”

Given that the PEP provider is required to be a named fiduciary to the plan, this provision within the Internal Revenue Code, unless an exemption is granted by the Department of Labor, exposes an advisor taking on that role to a tax of 15% of the amount involved in the tax year and 100% of the amount involved if the prohibited transaction is not corrected within the taxable period.

What fiduciary responsibilities are involved – for sponsors? Advisors? Recordkeepers/TPAs?

For an employer joining a PEP, the fiduciary duty is to prudently select it and its available account design options, then continuously monitor the plan and its service providers. An employer should consult with legal and benefits experts whenever possible to help it through this process.

For financial advisors, fiduciary responsibility depends on whether the advisor accepts 3(38) status. And for recordkeepers/TPAs, it depends on how the PEP is set up and what liability they have.

Where do you think the market could go in the coming years?

With the number of class-action lawsuits against 401(k) plan sponsors skyrocketing in 2020 and settlement values frequently exceeding $10 million, employers may look for ways to offer retirement savings vehicles to employees while trying to minimize cost and legal liability. Whether that is the growth of PEPs or state-sponsored plans remains to be seen, but the creation of PEPs gives employers a new option.

Unless something is done to stem the 401(k) litigation trend – either legislatively or judicially – it is likely that PEPs and similar plans will become more attractive to employers of all sizes. With this increase in excessive fee lawsuits, a company should consider fiduciary liability insurance, which can help cover the costs of defending a lawsuit and protects the company, its directors and officers and any administrators serving in a fiduciary role.