PEP talk: Is there room at the PEP Inn for plan advisors?
Here's why advisor roles may expand with pooled employer plans and how advisors can participate.
The Pooled Employer Plan (PEP) market is heating up. Currently, there are over 100 PEPs registered with the Department of Labor by their Pooled Plan Providers (P3s). At the current rate, the number of registered PEPs could easily surpass 200 by the end of 2021.
RIA firms, as well as their plan fiduciary advisors, have many existing plan sponsor clients, both small and large, that may be ideal candidates for a PEP solution. However, many RIAs and their advisors feel uncomfortable about this new phenomenon and whether they will have a place in the PEP market.
Many plan advisors feel that, unless they are acting as the 3(38) investment manager to a PEP, their roles are diminished or even eliminated and will subsequently suffer a significant loss of plan sponsor clients. However, in the now famous words of Mark Twain, “The reports of my death have been greatly exaggerated,” an advisor’s role with their plan sponsor clients that are contemplating a PEP has not diminished and, in fact, may have expanded.
How RIAs and plan advisors can participate in the PEP market
We will discuss why advisor roles may expand, but first, let’s examine how RIA firms and their advisors can participate in the PEP arena.
1. Act as a Pooled Plan Provider (P3) – Under the SECURE Act of 2019, Congress allows RIA firms to act as the P3 for a PEP. P3s assume ultimate responsibility for the administrative functions of the PEP and hiring and firing of service providers, as well as various other duties. Very few advisory firms are willing to accept such duties and responsibilities and so very few RIAs are willing to act as the P3.
2. Act as a 3(38) investment manager to a PEP – Since most PEPs hire a 3(38) investment manager to select and monitor plan investments, a few RIAs are assuming fiduciary responsibility as a PEP’s 3(38). However, since there are just over 100 registered PEPs, very few RIAs are acting in this capacity.
3. Act as a 3(38) for their own PEP – This has become a popular option for a few RIA firms. They partner with a P3 to sponsor the PEP and then private label and market the PEP as their own. Again, only a few RIA firms have opted to private label their own PEP.
4. Act only as an advisor/consultant for their adopting employer clients – The purest play for advisors will be to act as the advisor to new and existing employers that decide to join a PEP. Most small and medium size RIA firms will choose this option. Under this popular option, RIAs and their advisors can expect their fiduciary duties to diminish while their non-fiduciary consulting role will increase.
Why advisor roles may increase with PEPs
PEPs are designed to help reduce an adopting employer’s day-to-day administrative burdens while also reducing their fiduciary liability exposure. But PEPs are complicated platforms with many more moving parts than their single-employer plan (SEP) counterparts.
RIA firms and plan advisors/consultants will play a critical role in assisting employers as they contemplate transitioning to the PEP model. Why? Consider the following:
SEP vs. PEP – under a SEP, plan sponsors are responsible for vetting and choosing the ‘best’ service providers for their own plan. The same is true for a PEP.
However, contrary to a SEP, with a PEP the employer must carefully vet the various P3s, the PEP ‘wrapper’, the PEP service providers (including the PEP’s 3(38) investment manager), plan fees and other PEP anomalies.
With already more than 100 PEP options available, it is exceedingly difficult for potential adopting employers, particularly startups and small plans, to develop a prudent vetting process without assistance from a trusted advisor.
Ongoing PEP monitoring – once an employer joins a PEP, they are considered limited-scope co-fiduciaries and have an ongoing fiduciary duty to monitor aspects of the PEP platform.
As with vetting and choosing a PEP, the employer must diligently monitor the P3, PEP ‘wrapper.’ PEP service providers (including investments — i.e., the 3(38) investment manager) and other activities of the PEP. Again, the role of the advisor/consultant is critical for ensuring ongoing prudent monitoring.
Exiting their current PEP option – there no doubt will be times when an adopting employer will need to exit their current PEP platform. This will be a difficult and time-consuming task for the adopting employer as they search for another PEP option to join. The assistance of the employer’s trusted advisor/consultant will be invaluable to them.
PEP benchmarking – while not a current consideration, at some point, adopting employers will want to compare their current platform to other possible PEP options that better meet their participant needs. Advisor/consultants will be well-equipped to assist in the benchmarking process.
Other advisor services – there are other value-added services that an advisor/consultant will provide but are too numerous to mention here.
RIAs should seriously consider adding a PEP arrow to their quiver
At some point in the not-too-distant future, a rival RIA firm’s advisor will approach the RIA’s valuable plan sponsor clients, no matter their size, to discuss the benefits of joining ‘their’ Pooled Employer Plan option. If not prepared for this eventuality, many firms and their advisors will lose not only important retirement plan business but wealth management business as well.
Adding PEPs to a RIA’s existing retirement plan business model is not difficult if they follow certain protocols. First and foremost, advisors need to realize that PEPs (as well as their P3 sponsors) are NOT created equal. So, advisor firms should adopt an ‘open-door’ PEP policy allowing their advisors to shop the ever-growing universe of P3/PEP options available. Limiting the firm’s PEP choices to just one or two options severely restricts the advisor’s ability to assist the potential adopting employer in prudently selecting the ‘best’ PEP option for their participants.
One last suggestion for RIAs and advisors: Make sure to fully understand how the different PEP options allow for advisor compensation. Some PEPs bake advisor compensation into the 3(38) fees, some allow fees to be paid from plan assets (with adopting employer approval) and still other P3s forbid advisor fees to be paid out of the plan altogether. Of course, the advisor can still be paid directly from corporate assets of the adopting employer.
Bottom line: Adding PEPs to their existing product offering is a Win-Win proposition for RIA firms and their fiduciary advisors.
