Status update on pooled employer plans for sponsors and advisors
PEPs can be a way to ease the administrative burden and mitigate the risks associated with plan sponsorship, but there's much more to this market than meets the eye.
Several regulatory and market factors are converging to make 2021 the year that pooled employer plans (PEPs) could begin to make significant headway in the market.
The bipartisan Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed into law in December 2019, outlined the new retirement savings vehicle that allows unrelated companies to participate in a defined contribution plan that is professionally administered. The goal behind PEPs is to increase retirement savings coverage across the country by giving small and mid-size employers an easy way to offer a plan to their employees.
“We have a huge coverage issue, meaning there aren’t enough people out there who work for small businesses that have access to a workplace savings plan like a 401(k),” said Chad Parks, founder and CEO of Ubiquity Retirement + Savings. “The stats are mind-boggling. Almost 50 percent of all working Americans don’t have access to a retirement plan at work.”
New tax credits available starting this year provide further incentive for small businesses to offer a 401(k) retirement savings plan, said Parks. The government is now offering up to $5,500 each year for up to three years to cover the costs a small business incurs starting up a retirement savings plan.
“Retirement plans are on sale,” said Parks. “You see this momentum coming out of Washington saying here’s what we think is a better mousetrap and here’s some money on the table to help get people moving.”
In addition to regulatory momentum, market trends have also created an ideal atmosphere for PEPs to take off.
In addition to dealing with the COVID-19 pandemic that occupied an inordinate amount of attention over the past 12 months, HR departments have also been coping with a growing litigation risk involving DC plans, said Preston Traverse, DC Mid Market Solutions Leader at Mercer Investment Management.
As a result, many companies are looking for a way to ease the administrative burden and mitigate the risks associated with plan sponsorship, and PEPs offer an opportunity to offload the day-to-day operation of the plan.
Additional benefits include potentially lower fees for participants and costs for plan sponsors, as well as greater access to institutional investment options, particularly for small to mid-market companies that might not have access to those options on their own.
Pooling isn’t necessarily a new concept. Multiple employer plans (MEPs) allow similar companies to join group plans, while association plans allow companies that are members of an association to participate in a pooled plan, said Traverse.
Groups of plans, or exchanges, allow several plans to use the same investment lineup and plan prototype to achieve economies of scale while still maintaining sponsorship with the employer.
However, thanks to the SECURE Act, PEPs will allow different types of companies to participate together in a plan for the first time.
PEPs will be offered and managed by Pooled Plan Providers (PPP), which must register to become a PEP plan sponsor and fiduciary.
A PEP includes all of the pieces of a traditional retirement savings plan, including a sponsor, a fiduciary, a third-party administrator, a record keeper and an investment manager. Providers may bundle and offer several pieces themselves or hire other providers to perform them.
PEPs are likely to be offered on a prototype document with few customizable elements of the plan design. Traverse said companies may still be able to decide whether they will match and how much, who is eligible, and whether they will offer a safe harbor provision.
While employers will offload many of the day-to-day tasks of plan sponsorship, he noted they are still responsible to act as a fiduciary in terms of selecting the PEP, ensuring the fees are reasonable, and monitoring to make sure it’s being maintained properly.
“At the end of the day you have to make sure they aren’t blowing anything up,” he said
Traverse said he expects payroll providers like ADP and Paychex to offer PEPs in the micro market encompassing businesses with less than 50 employees.
Registered investment advisors (RIAs), broker dealers and insurance companies are likely to address the market between $5 million and $25 million in assets as they will need a higher level of advice, he said.
Traditional consultants and HR consulting firms will address the market above $25 million geared toward large small-market firms and mid-market firms. Larger firms are likely to continue to offer standalone 401(k) programs, he said.
“The idea is the SECURE Act is going to increase coverage, so our opinion is there is going to be a lot of attempts in the $0 to $5 million market to get people signed up and introduce them to 401(k) plans,” said Traverse.
“The one place I do think large firms may eventually go is custom PEPS or organization PEPs where they create a custom PEP for a holding company with a whole bunch of companies underneath that they want to roll into more of an organizational PEP that they then get a PPP to sponsor for them.”
Several dozen entities have already registered to become PPPs and some plans are beginning to hit the market.
“There has been some headwind because people are still waiting for some of the guidance from the Department of Labor, especially with the Biden administration coming in,” said Traverse. “We don’t think that anything is going to come down that’s going to blow up all this effort that all these firms have put into allowing small or mid-size firms to pool together or outsource their 401(k) plans.”
So why should a small business that hasn’t offered a retirement savings plan in the past want to consider doing it now? In addition to the tax incentives and the easy-to-use PEP structure, Parks said they help employers recruit and retain talent.
“As a business owner you’re burdened with so many things — regulations and taxes and health care and workers comp and insurance, and the last thing you want is to worry about a retirement plan,” said Parks.
“But a retirement plan is super inexpensive compared to health care. You don’t have to do any matching in most cases and the relative cost and time this would take has a much bigger impact and benefit for employees than almost all your other benefits that you have to provide.”
In addition, Parks noted many states are beginning to require businesses to offer retirement plans.
Parks noted that the 3(38) fiduciary role is taken care of with a PEP, leaving many advisors to wonder what their role in PEPs will be. He encourages advisors to embrace the more subjective and human functions of retirement saving beyond picking and monitoring investments, from becoming a retirement readiness expert to offering enrollment and education sessions.
“It offers an opportunity for advisors to become more hands-on with a larger audience,” said Parks. “From an advisor standpoint, that’s a great way to grow your practice.”
Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel. She also was a reporter for Business Insurance magazine covering workers compensation topics.
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