There have been numerous headlines over pooled employer plans (PEP) in the past six months. I’ve seen plans announced from Aon with Voya; Fidelity; Lockton with Newport; Mercer with Empower Retirement; Sallus Retirement; and TAG Advisors with Voya, among others.
It’s easy to understand the enthusiasm. “A major advantage for plan sponsors of all sizes is the circle of fiduciary experts that accompany many of the PEP plan designs,” says Jackie Reeves, managing director at Bell Rock Capital. “There is a significant amount of fiduciary responsibility on the plan sponsor that accompanies offering a retirement plan to employees; the pooled approach makes sense to comply with the regulations and serve plan participants and their beneficiaries.”
Looking Under the Hood
Nonetheless, some industry participants are cautious about PEPs’ prospects. Brian Haney, CLTC, founder and vice-president of The Haney Company, maintains that pooled provider options “are still slow in development.” He notes that although the theory of asset pooling to reduce expenses seems sound, “the reality is that it is not just as easy as bringing a bunch of small plans together under one roof.”
The key that many people fail to understand is that 401(k)s are regulated by their plan documents, Haney explains. While there may be significant similarity when it comes to fund lineups, there is much diversity when it comes to how a plan is designed. Consequently, a pooled plan provider will need a platform to accommodate what may be a variety of eligibility criteria, various matching formulas, vesting schedules, etc.
“There is also the additional logistical challenge behind integrating various payroll providers,” Haney adds. “We find these challenges already exist in the MEP marketplace, which is why there is likely a slower adoption behind the creation of these platforms. Additionally, in a market where radical fee compression has limited the profitability of 401(k)s, a movement to essentially further reduce their profitability through group buying may not be as appealing across the provider landscape as people think.”
Preston Traverse, a partner with Mercer’s investment business, says it makes sense to bifurcate a discussion of the PEP market. The SECURE Act’s main goal with PEPS was to expand coverage and it looks like PEPs are having initial success in the start-up market which aligns with that goal. “We have heard that some payroll providers have had success enrolling small startup plans,” he says. “However, as it relates to the mid- and large-markets, we have not seen any uptake. We have seen some of the concepts of a PEP, such as reducing administrative burden and delegating fiduciary responsibility, resonate to sponsors in the mid- and large-market, however, the lack of regulatory guidance has become an impediment."
John Bartels, managing director at Ancora Retirement Plan Advisors, shares that view, describing the initial interest by plan sponsors as limited to none thus far in 2021. “During our initial due diligence, it did seem that PEPs would be slowly rolled out by some, but not all, of our recordkeeping partners,” Bartels notes. “Many of the recordkeeping partners we spoke with didn’t have concrete plans to produce a PEP early in 2021. They seemed to take a wait-and-see approach. It also seemed that PEPs are limiting plan design features that smaller companies enjoy the most; i.e., flexible matching formulas, flexible vesting schedules and who would be selected as the plan’s 3(38) full investment advisor.”
The initial target market for PEPs has been smaller startup plans. For instance, Fidelity’s plan is limited to companies with five to 50 employees offering a retirement plan for the first time. But a joint survey from Cerulli and The SPARK Institute and reported in the Cerulli Edge U.S. Retirement Edition (4Q, 2020, Issue #57) listed the primary reasons small business owners don’t offer retirement plans. The top reasons, which PEPs will need to overcome, include:
- Too expensive to set up a retirement plan (39%)
- More focused on day-to-day operations and growing the business (34%)
- Prioritize other employee benefits over a retirement plan (25%)
- Waiting for the business to grow larger before offering a retirement plan (24%)
Emergence of PPPs
Haney believes the rollout of pooled plan providers (PPPs) will be “slow and calculated.” He cites the prospect of thinner margins, the complexity inherent in integrating various payrolls and navigating various plan design elements as factors. “I think providers are seeing where such opportunities exist in a marketplace that has already undergone significant changes, fee compression and seen several consolidations at the provider level already,” he adds.
Mercer’s stats support the idea that the initial rush to announce the formation of a PPP has slowed. Traverse cites a reduction of registrations for PPP offerings: “By the end of February there had been roughly 45 registrations. In the last 6 weeks (through mid-April), less than an additional 10 have been added."
The Regulatory Overhang
PEP/PPP regulations are subject to change, as well. Geoff Manville, Mercer’s Government Relations Leader, points out that potential legislative changes included in “SECURE 2.0” legislation, which he expects will be reintroduced this year, would let 403(b) plans join pooled plans. The bill would also make the current start-up tax credit available to eligible employers joining a PEP or MEP for up to three years starting from when the employer joins the PEP instead of the PEP’s start-up date.
“On the regulatory side, we’re waiting for a ton of guidance from the DOL including model plan language, the required administrative duties of PEP providers, what auditing standards will apply, and what, if any, PTEs should be issued to address conflicts of interest,” says Manville.
“In addition, IRS/Treasury is being urged not to apply the employee service crediting rules that apply to traditional multiple employer plans to PEPs. The argument is that employers participating in a traditional MEP are required to have a common bond, which makes the service crediting rules applied across the entire plan appropriate in that context. In a PEP, however, these rules are less appropriate because the employers may not have any relationship besides shared participation in the PEP."
As more details emerge on individual PEP’s structures, investment lineups and fees, the next step will be comparing those features and costs to determine how PEPs rank among themselves and when a PEP makes sense versus the available plan alternatives. But given the slow start that 401(k) plans experienced when launched, it could take a few years before a clear picture of PEPs’ role in the marketplace emerges.