Skip navigation
retirees sunset Copyright Sean Gallup, Getty Images

2024 Will Be the Year of the PEPs

Record keepers are the biggest inhibitors.

Pooled Employer Plans are neither a fad or a panacea, a question I asked in a July column because they are not a catalyst of change. They are a reaction to societal changes and an almost perfect solution to the issues created by the explosion of small retirement plans, wealth advisors growing interest in 401(k)s and the convergence of wealth and retirement at work.

Group plans like MEPs have been around for decades allowing employers to pool resources, which can result in lower costs, liability and work. In essence, defined contribution plans exist because they enable employees to pool their assets to get better pricing and more efficient solutions than they can on their own spurred by greater tax incentives.

But MEPs require some common interest among plan sponsors like the American Bar Association or PEOs—until SECURE 1.0, financial service companies like record keepers, asset managers and broker/dealers could not take advantage of this scheme for all clients. The build up to the enactment of SECURE 1.0, which took a couple of years to pass, led to overly optimistic expectations for PEPs.

Almost immediately after passage of SECURE 1.0 at the end of 2019, the pandemic hit. While COVID-19 inhibited their growth initially, it also led to the war for talent and unprecedented job growth making benefits, especially retirement plans, a top priority. SECURE 2.0 tax credits and the surge of state mandates as well as growing interest by wealth advisors in DC plans have made PEPs even more popular.

The projected growth of 401(k) plans is overwhelming. Cerulli is estimating an almost 50% increase from 2021 to 2029 resulting in a growth from 654,000 to 970,000 plans, compared to just a 24% increase in the previous nine years. Cerulli’s Shawn O’Brien said its estimates were conservative on growth and aggressive on terminations, which are obviously much higher for smaller businesses.

There is no way that the dwindling number of 12,000 specialists or RPAs can handle the almost 400,000 new plans, accounting for terminations. Even by deploying PEPs, specialists will be more focused on cross selling wealth services to existing participants and larger, more lucrative plan opportunities that may require complexity and customization.

That means the 62,000 dabblers and 216,000 non-specialist advisors driven by calls for help from wealth clients who own or run a business as well as opportunities to acquire new wealth clients within these plans will need to be activated. PEPs are a simple and elegant way for these relative novices to outsource the Triple Fs to focus on what they know and do well. Which will only become more attractive and less costly as they get scale.

Though over 500 PEPs have been filed with the DOL, many thought they would have grown faster. So what are the inhibitors?

According to Kelly Michel, an industry consultant focused on PEPs who helped start and run Transamerica’s group plan business in the early 2000s, record keepers are the biggest problems.

“The legacy distribution and pricing model of record keepers are not built for PEPs,” notes Michel. “They avoid being a fiduciary but bristle at not having control shifting fiduciary duties back plan sponsors. Most are not leveraging tax credits in their pricing models.”

Kelly claims the average wholesaler close rate at Transamerica for single plans was about 15%, which skyrocketed to 65% for their group plans, driven by inquiries sent to their call centers. It’s a more efficient but different distribution model. “Record keepers are not paid to activate or educate advisors,” she says. They are paid to close plans.

One record keeper has seamlessly adopted this new paradigm because they were already built for it. Paychex has 25,000 plans in a PEP for their over 100,000 DC clients. “We didn’t have to do much adaptation,” says Craig Silverstein, Head of Paychex’s Retirement Services Product Strategy. “Our hundreds of consultants are meeting with thousands of employers every week helping small businesses deal with costs, complexity and solution awareness.”

Led by the war for talent and state mandates, Silverstein is noticing a growing interest in DC plans by small business as well as generalist advisors who see opportunities to grow their wealth business. He notes, “PEPs are less expensive for participants.”

Granted, the Paychex model is different than traditional record keepers, with over 400 external salespeople and 740,000 payroll clients as are the models for ADP and fintech record keepers, many of whom partner with payroll providers like Gusto. But those providers, along with banks like JPMorgan Chase, are better suited to handle the expected 50% explosion of small plans, which could dramatically affect TPAs  and wholesaler process and compensation.

PEPs did not create the need for a more efficient, cost-effective record keeping, administration and distribution solutions, but they are the perfect solution even for larger plans plagued by litigation, which is only expected to grow, and the desire to outsource work. It’s time for the DC industry—both providers and distributors—to look for alternative business models and stop resisting the obvious solution though the transition will not be easy resulting in new competitors accelerating record keeper consolidation.

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.