What should current plan sponsors do when a pooled employer plan (PEP) is pitched to them as a solution for offering a retirement plan to employees? Many current plan sponsors already use help that is available—3(16) plan administrators, 3(38) investment managers—so they should weigh the appeal of offloading some responsibilities to a pooled plan provider (PPP) carefully.
Rich Rausser, senior vice president, client services, at Pentegra, says plan sponsors need to evaluate the pros and cons of any service provider or arrangement, including ones they are currently using. “They have an obligation to do what’s in the best interest of plan participants and to come up with solutions that are good business solutions as well,” he says.
“Even if a plan sponsor thinks its plan is running fine, a PEP at least deserves an evaluation,” Rausser notes. “A PEP can be a great solution for a lot of existing plans.”
Theodore Schmelzle, second vice president, customer operations, at Securian Financial, says plan sponsors are being ever pressured to do more, and running a retirement plan is extremely complex.
“There are multiple traps for the unwary, and, in many instances, plan sponsor staff members don’t have the knowledge, experience or expertise to navigate such rocky shoals,” he says. “For plan sponsors seeking help outsourcing fiduciary responsibilities, PEPs could be an attractive candidate.”
Schmelzle says he believes the current mechanisms plan sponsors use for that type of help are not as effective as PEPs. “PEPs do represent, in my estimation, the highest degree of fiduciary and administration transfer to folks who know how to do it, whether that be a TPA [third-party administrator], RIA [registered investment adviser] or recordkeeper,” he says.
Schmelzle further explains that while 3(16) plan administrators and 3(38) investment managers are valuable, the bottom line is the plan sponsor is still the named Employee Retirement Income Security Act (ERISA) fiduciary.
“With the advent of the pooled plan provider, those burdens are removed from the shoulders of plan sponsors,” he says. “If looking for help with fiduciary and administrative tasks is what is important to plan sponsors, the movement of those tasks makes PEPs the most effective option.”
He adds that plan sponsors will still have some remaining duties—the submission of data and the fiduciary choice of participating in a PEP will not go away—but with a PEP, they can shed many responsibilities they still would have if they engaged a 3(16) or 3(38).
PEPs are often touted as a solution for startup plans or smaller plan sponsors, but Rausser says there’s no question a PEP could be an excellent solution for some larger plans. He adds that Pentegra has seen some instances where large plan sponsors are interested in PEPs for two main advantages: fiduciary outsourcing and a cost-saving impact from bundling all services together.
PEPs offer a fiduciary provider, recordkeeper, investing help and the audit function all in one package, and, in some instances, plan sponsors find they will get a more cost-effective solution with a PEP, Rausser explains. However, he adds that not every PEP will be more cost effective or necessarily cheaper because some PPPs are bringing more services to the table.
Schmelzle says he thinks it’s too early to tell what the full extent of PEP market disruption will be, though he has seen more interest than he expected at this point. “We’re still in the early innings, but I haven’t seen anything to dissuade the notion that PEPs have the potential to change the landscape of the way plans are structured and administered,” he says.
Whether PEPs are appropriate for larger plan sponsors has been the subject of speculation in the industry, Schmelzle notes. He says he’s heard some industry players say they are good for jumbo plans, some target them for plans with $100 million or less in assets, and some think they’re only useful for small and startup plans.
“The jury is still out on where the sweet spot is, but from a legal standpoint, I don’t see why plans of any size couldn’t participate in a PEP,” Schmelzle says. “The question is whether or not it is appropriate for the plan and participants.”
However, he adds, “It seems as you get into larger plan sizes, for which design could be more detailed and the plan sponsor could have dedicated staff for the plan, the utility of a PEP lessens.”
Although situations vary, he gives an example of when a PEP could be especially useful. “If an employer has a plan that is right at the DOL [Department of Labor] audit threshold, and perhaps has $5 million to $15 million in assets, that’s probably a vibrant small business that’s growing, where cost and the attractiveness of benefits is a significant issue,” he says. “That employer would benefit from outsourcing administrative responsibilities. A PEP would check a number of boxes for such a plan sponsor.”
Things to Evaluate
Rausser says current plan sponsors should look for PEPs with some scale. There is an audit exemption for PEPs with no more than 1,000 participants and no participating employer with more than 100 participants. “My thinking is that PEPs that are smaller than that audit threshold won’t have the scale they need to operate cost-efficiently,” he says.
Rausser adds that another critical and “probably most important” thing to look for in a PPP is experience. He says 100 or so PEPs have been established to date, and many PPPs are new to the fiduciary side of the business. “Providers may have the knowledge of administering plans, but many haven’t been experienced in effectively discharging fiduciary duties,” he says.
Plan design is another consideration when evaluating a PEP. Plan sponsors will need to think about the many different plan design options PEPs offer, as there are nuances among the offerings put out there by different types of PPPs, says Schmelzle. Plan sponsors will have to decide which one is right for them and also think about cost, as different plan designs produce different price points.
Rausser suggests plan sponsors include PEPs in regular requests for information (RFIs) and requests for proposals (RFPs) or other benchmarking of service providers. “When evaluating a PEP, look and learn, but only leap into it if it’s the best solution for participants and the sponsor,” he says.
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