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Are PEPs a Panacea or Passing Fad for 401(k) Plans?

MassMutual is making a big bet on its newly released program.

The long-awaited pooled employer plan legislation in SECURE 1.0 has been predicted by some to have the same profound effect on the defined contribution industry as the 2006 Pension Protection Act, which heralded auto plan features. But the move to PEPs has been slower than many expected though it is still early and there are some promising signs.

So will PEPs revolutionize 401(k) plans like auto features or will they just be another option that a limited number of employers, providers and distributors deploy?

“A lot of people have taken a ‘wait and see’ approach,” noted Pete Swisher, managing partner at GPS. “But everybody is thinking about it.” Swisher’s partner at GPS and noted ERISA attorney Jason Roberts added, “The pandemic didn’t help. Some are waiting on further DOL guidance.”

Still, there are currently 350 PEPs filed, according to Robb Smith, president at RS Fiduciary, a slowdown in 2023; there were 300 PEPs filed in late 2022 by 100 pooled plan providers.

The case for PEPs is obvious and compelling. Employers have been eager to outsource as many fiduciary duties to third parties—administrative functions are arguably more complicated and onerous than fund analysis. Basically, employers would like to limit liability, cost and work, which PEPs offer.

The needs of employers differ by plan size. Micro and startup plans require a new model to scale and keep costs low while getting the kind of service most payrolls and fintechs do not offer. “Smid” plans are concerned about liability and workload for their HR, benefits and financial professionals juggling many roles with little to no support and training. Larger plans targeted by the rampant lawsuits are looking for protection while also outsourcing mundane administrative tasks.

Though Lisa Kottler, chief growth officer at Sallus Retirement, claims PEPs are less expensive than traditional DC plan options, Swisher argues, “Cost depends on the program—getting it right may not be cheaper but can be once the PEP achieves scale.” Smaller plans not currently subject to audits will be just as plans that currently need an audit can reduce those expenses. Smaller and start-up plans have access to very inexpensive investments especially through CITs. Larger plans want customization, which might increase costs while Kottler asks, “Have we oversold customization?”

Ironically, PEPs may expose smaller plans not currently targeted by the plaintiff’s bar to lawsuits as they grow and achieve scale.

Should the pooled plan provider be independent, in other words not the record-keeper, asset manager or advisor? “If employers are dissatisfied with the record-keeper who is also the PPP, they each have to leave and find a new provider,” notes Roberts, who also commented, “Most of our PRI clients do not want to be the PPP.”

MassMutual recently announced that will be offering a PEP exclusively to its advisors in partnership with Alerus, a record-keeper, and Access Retirement, an independent PPP paid directly by the participating employers with MassMutual as the 3(38). The PEP was created to meet the needs of their 7,500 reps, of which just over 100 can act as fiduciaries and are considered experts, whose clients may need to create a retirement plan because of state mandates or who want to leverage the tax credits.

Working with one of their top advisors to design the program, Andrew Cleary, partner at SFP Wealth, the PEP—which does not carry a MassMutual branding—is designed for the small, startup market competing with direct sold fintech providers while streamlining paperwork to simplify the process.

“Other broker/dealers struggle to accommodate experienced advisors that want to be the 3(38) and the less experienced advisors,” noted Cleary. Their PEP allows experienced RPAs to serve the small and start-up market while partnering with advisors in the network.

The uptake on state plans has been muted, slower than expected because auto IRAs have limited value to the employer, workers and providers. But, along with tax credits in SECURE 2.0, they are spawning dramatic new plan growth. Wealth advisors, along with RPAs that are owned by or get referrals from benefit firms, need to efficiently set up and serve this market. PEPs are a logical solution but, like anything, design and execution are everything. MassMutual’s PEP program is a promising sign and a beacon for other distributors.

Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.

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