The Setting Every Community Up for Retirement Enhancement (SECURE) Act helped clear the way for pooled employer plans (PEPs) to launch operations in January 2021. So far potential pooled plan providers (PPPs) have been largely quiet about their intentions to enter the market. News reports earlier this year said that American Pension Services LLC was working with Strategic Capital Advisers LLC to provide a PEP. Among the large firms Aon plc announced in late June that it had teamed with Voya Financial to develop a PEP.
It’s easy to see why these plans could appeal to firms currently with or without 401(k) plans. From a cost perspective, scale matters and PEPs will offer scale. According to the 401k Averages Book 20th Edition, a small plan with 50 participants and $2.5 million in assets incurred a total annual plan cost of 1.37% of assets. In contrast, a $50 million plan with 1,000 participants (same $50,000 average balance per participant) incurred a cost of 0.91% of assets. Joining a pool provides instant scale.
Rick Jones, senior partner, national retirement practices with Aon, says potential cost reductions from leveraging scale resonate strongly with PEP prospects. “I think the biggest opportunities there are in the smaller-employer segment, but we're seeing significant cost-savings opportunities among medium- and large-size organizations, as well,” he says. Jones also cites the role of larger scale in providing plans with less costly access to top-tier record-keepers.
Reduction of fiduciary risk is another motivator. The pooled model lets organizations work with a PEP provider that is willing to take on more of the associated fiduciary risk, reducing employers’ exposure. A third factor is the reduction of time spent administering the plan, allowing the sponsor to focus more on its core business, he adds.
What to Review
Fred Reish, an attorney and partner with Faegre Drinker, notes that a PEP evaluation should begin with examining the PPP’s qualifications and experience. Employers also should consider the costs of the plan and investments, the services to be provided to the plan and participants, and the administrative and fiduciary burdens taken over by the PPP and the other plan service providers. If an employer evaluates several PEPs on those criteria, he writes, it will begin to see the differences in business models, services, investments and costs. It is critical to know and compare those features, and then to determine which arrangements are best for that company and its employees.
From a participant-facing standpoint, a broad range of reasonably priced and high-value investment funds is essential, says Jones, adding that administration, record-keeping, plan-support systems and cybersecurity are also important.
The Aon PEP will have one pool with both fixed and flexible provisions, says Jones. Some provisions, such as the availability of loans, withdrawal and distribution options will be fixed, but there will be extensive flexibility around investments and plan design. In other areas there will be a range of choices, he says: “How do you determine service for various purposes? How do you determine vesting provisions plan automation like automatic enrollment and automatic escalation? So there'll be some flexibility there.”
Jones reports that Aon is “seeing some pretty robust interest” in PEPs, although not every organization is interested in being an early adopter. But what’s particularly encouraging is that the response to the pooling concept has been uniformly positive, he says: “We have yet to hear somebody tell us this isn't a good idea for the long term.”
Reish says there appears to be interest among consultants and among entities considering setting up PEPs. At this point, though, he believes most employers are not aware of these new PEP arrangements but awareness will increase once the advantages are explained to them. In all likelihood, much of the initial interest will be among employers who do not yet have a plan but want to set one up. “Then I believe that other employers, which already sponsor plans, will begin to look at PEPs, particularly if they are dissatisfied with their existing plans or their service providers,” he explains. “It will likely take a few years for PEPs to become well-known and widely adopted.”
So does it make sense to start discussing PEPs in mid-2020? Jones says it depends on the organization’s governance and fiduciary structure, but employers should be working to ensure that they will be in position to make an informed decision.
Reish maintains it’s still too early because only a few plans have been rolled out so far. “In the coming months, more will become available with different models, services and costs,” he points out. “Employers should wait until there is a reasonable selection so that they can compare competing providers.”
In any case, it’s worthwhile to start monitoring PEPs’ availability and features as they come to market. These arrangements could become significant in the 401(k) market over time and expertise with the plans could add value to your service offering.