The power of pooled employer plans: A guide for advisors and small businesses
PEPs are a compelling option for employers and advisors seeking efficient, cost-effective recordkeeping solutions – and by entering a PEP, the employer reduces its fiduciary responsibilities.
The landscape of the retirement plan industry is quickly evolving. Staying on top of the latest trends means knowing what tools you have at your disposal. Enter Pooled Employer Plans, or PEPs. PEPs are a compelling option for employers and advisors seeking efficient, cost-effective recordkeeping solutions.
The Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, is ushering in a new era for retirement plans. But what are PEPs/? What are the factors to consider when determining if PEPs are right for them? Let’s dive in to learn more.
The evolution of retirement plans fiduciary responsibilities
Before diving into the specifics of PEPs, let’s look at the landscape of retirement plans over the years. For decades, employer-sponsored retirement plans have been the cornerstone of retirement planning. They offer tax advantages in an employer-sponsored savings vehicle. Yet the traditional model had limitations. Smaller businesses, employers with limited resources, and plan sponsors who lack the knowledge to administer retirement plans were all at a disadvantage.
Passed in December 2019, the SECURE Act created the first new entity under the Employee Retirement Income Security Act of 1974, or ERISA, almost 50 years ago. The Pooled Plan Provider, or PPP, is the first new entity created under ERISA since its creation. It’s a powerful new tool and changes the geography of who is the plan sponsor.
With traditional single-employer plans, employers serve as the plan sponsor. The administrative fiduciary responsibilities fall upon them. The plan sponsor of the PEP is the Pooled Plan Provider. This means plan administrative duties that the employer used to preside over are now run by the PPP. The PPP is the plan administrator of the PEP and the ERISA Section 3(16) fiduciary.
Over the years, we’ve seen shifts in roles with fiduciary responsibilities. Starting with the risk-transfer relative to investments, ERISA 3(21) investment advice fiduciaries and fully discretionary ERISA 3(38) investment managers allowed employers to transfer some of the fiduciary responsibilities to investment advisors and investment managers who had expertise in those specific areas. We’ve also seen the advent of ERISA 3(16) administrative fiduciaries roles evolve. This allowed plan administrators to transfer the risk of administrative fiduciary liability to experts.
As the creator of the PEP, those risks are already with the PPP. The fiduciary responsibilities are not something that the employer must transfer, since when they join a PEP, they have already been assumed by the PPP. This is an important distinction. Employers entering a PEP should understand that the PPP can still outsource fiduciary risk, such as selecting an ERISA 3(38) investment manager. Each PPP may have different requirements when selecting fiduciaries, but it is up to the PPP and not the employer.
What employers need to know
There are a lot of factors for employers to consider. Here are the three things employers should think about before joining a PEP:
- Employer fiduciary decisions exist in all plan structures
Let’s say an employer is considering joining a PEP to shift their fiduciary responsibilities. But an employer can’t completely divorce itself from the fiduciary role. Even with a PEP, the employer still has some fiduciary decisions to make.
For example, selecting a PPP based on the parameters, costs and everything else associated with the PEP is a fiduciary decision. The ongoing decision to stay in the PEP is also a fiduciary decision the employer must make.
Another responsibility is submitting timely and in good order payroll data. Each adopting employer must verify data, such as payroll data, to assure that they and the PEP remain in compliance. The PPP handles the audit as the PEP’s plan sponsor, which can transfer significant work off the employer’s plate. But the employer is responsible for providing accurate data for the audit.
- Cost vs. services provided
In a hypercompetitive market, PEPs can be a cost-effective solution. Each PPP provides different benefit options in their PEP. Employers should find out what they’re gaining and/or losing by switching from the traditional model.
- How much control does the employer want/?
By entering a PEP, the employer reduces its fiduciary responsibilities. But they’re also transferring some of their control over to the PPP. If the employer requires an intricate or complicated plan design, then a PEP may not be the solution for them.
For example, some employers have complex compensation definitions. Bonus structures, sales incentives and employee classifications may complicate things. In these cases, a PEP may not be the right solution.
Other employers who want fund selection and control may not benefit from a PEP, as they will not be able to select their own fund lineup. The fund lineup is based on the PEP’s selection and not each individual employer within the PEP.
What advisors need to know
PEPs have only been in the marketplace for a few years. There’s a lot to consider before advisors offer them to their clients. Here are the three factors to consider:
- Understand your client’s needs
Before considering a PEP, advisors should understand the needs of their clients and how the PEP is designed. Not all PEPs or PEP providers are equal. Here are some examples of PEP design features:
- Some require proprietary investment options.
- PEPs can seek to limit plan design options to reduce cost.
- Some PEPs act as a mechanism to monetize the participant.
- They can separate recordkeeping functions from the PPP because of conflicts of interest.
Some focus on maximum plan design flexibility, with administrative and fiduciary outsourcing done at a fair price.
2. Know the advantages and disadvantages of PEPs vs. traditional model
Advisors should be able to articulate the advantages and disadvantages of a particular PEP. Especially for those not yet offering them to clients.
PEPs have legally been in the marketplace since Jan. 1, 2021. We’ll soon start seeing multiyear data and others will begin to sell PEPs. Clients who aren’t offered this product will want to know more so they can make an informed decision.
Related: 2023: The dawn of a new era in retirement planning for small businesses
- Different employers will have different needs
PEPs are here to stay and will be increasingly top of mind for employers — no matter their size. Advisors should understand the needs of their clients before exploring PEPs. The employer’s orientation toward plan design, cost structure and administrative and fiduciary risk transfer are a few of the things that need to be considered.
As you can see, analyzing what your clients’ needs are against what different providers offer will help guide them to an informed decision. What is quickly becoming reality is that if you’re not talking to your clients about PEP options and whether they are right for them, another advisor probably is.
Ted Schmelzle, J.D., is the Second Vice President, Retirement Plan Services, at The Standard. Beginning his career in 1996, Ted served as legal counsel for group life and retirement divisions. Since 2014, he has led the plan sponsor services area, where he has consulted on Pooled Employer Plans, field relationship management, plan administration and recordkeeping.