A little over a year since their introduction, pooled employer plans are drawing increased interest from companies of all sizes looking to take advantage of economies of scale to lower their retirement plan costs while improving returns for participants.
“We’re seeing interest certainly in a lot of smaller employer situations,” says Rick Jones, senior partner and head of national retirement practices at insurance giant Aon, which provides pooled employer plans. “But this is going upmarket relatively quickly,” he adds. “Employers of all sizes and shapes are saying this is something we should be considering for our retirement program.”
PEPs, which were established by a provision in the Setting Every Community Up for Retirement Enhancement Act and came into effect in January 2021, allow companies to band together to participate in a single plan managed by a pooled plan provider. The SECURE Act removed potential legal barriers to the broader use of multiple employer plans and amended the Employee Retirement Income Security Act of 1974 to permit PEPs.
Previously, employers could only join together in a multiple employer plan and could only be joined by employers that shared a common business element or were part of the same professional employer organization. However, companies participating in a PEP are not required to have any common business element, and unlike multiple employer plans, PEPs are not subject to the so-called “one bad apple rule,” which stipulates that an entire plan could face disqualification if just one participating employer causes it to violate ERISA rules.
PEPs are intended to expand retirement plan coverage primarily among smaller employers that don’t offer employees a retirement plan due to reasons such as cost, compliance and administrative burdens or liability exposure. They can cost less than single employer defined contribution plans, reduce liability and allow employers to outsource the operation of their retirement plans. They can also offer some features that a company might not offer through a single employer plan, such as insured and/or non-insured retirement income options.
Pooled plan providers are required under the SECURE Act to register with the US Department of Labor and the Department of the Treasury. The pooled plan provider is the named fiduciary of a PEP, acts as the plan administrator and makes sure all firms handling assets are bonded. A provider can be a third-party administrator, insurance company, mutual fund management firm, broker/dealer or even an individual. To help offset startup costs, the SECURE Act provides up to $5,000 in tax credits to eligible employers, with an additional $500 tax credit available for using automatic enrollment for the first three years that the plan is effective.
Craig Silverstein, senior product strategy manager with human resources and payroll services company Paychex, says that PEPs can significantly lower administrative duties because no Form 5500 has to be filed with the IRS, and there are no annual plan audits or fees for companies with fewer than 100 eligible employees.
“If the plan sponsor is looking to offload the majority of the fiduciary liability, a PEP can be a solution for any size plan,” Silverstein says. “Since there is no required annual audit work [or] associated fees, this can save thousands of dollars for a plan sponsor, with the PEP being audited by the PPP.”
Lower Fees, Less Work, Reduced Risk
For employers, the three main advantages of PEPs, as compared to traditional DC plans, are less work, less risk and improved outcomes, says Jones. As a PEP provider, Aon has discretion over plan administration and investments, which can reduce the administrative burden and risks for participating companies. It is also responsible for selecting and monitoring third-party vendors hired to deliver services for the PEP, such as trustees or custodians, record keepers, investment managers and external advisors, such as auditors. And this translates to less work and lower fees for an employer.
“Less fees means there’s more money growing for retirement income,” Jones says. “Our calculations suggest that a well-designed PEP can lead to an 11% larger account balance at retirement, and fund perhaps an additional two years of retirement.”
PEPs can also mean less risk for employers, says Jones, who notes a surge in excessive-fee lawsuits filed in recent years against companies providing retirement plans. With a PEP, the employer shifts the fiduciary responsibility—as well as the legal burden under ERISA that can come with it—to the plan provider. According to the law firm Groom Law Group, more than 200 ERISA class action lawsuits were filed in 2020, an 80% increase from the previous year. And according to law firm Seyfarth Shaw, the monetary value of the top 10 ERISA class action private plaintiff settlements entered into or paid in 2021 totaled more than $411 million, up from $380.1 million in 2020 and $376.35 million in 2019.
How to Pick a Provider
When picking a pooled plan provider or a specific PEP, the decision-making process involves many of the same considerations an employer makes when designing their own plan, says Ed Farrington, head of North American distribution for Impax Asset Management. Employers considering a PEP should ask providers to take them through the process of how they constructed the plan, he says, so the employer can decide if that matches their employees’ needs.
According to Farrington, some questions employers considering offering a PEP should ask include:
- Was there a rigorous process for choosing an investment menu?
- Are the costs of those underlying investments in line with what the industry costs are for similar investments?
- Are there investments that meet the needs of my participants?
- Is the plan accessible via digital tools?
- Is it reporting information that is helpful for participants to understand if they are on track to meet their retirement goals?
“You’re asking all the same questions with a PEP, but you’re actually able to tap in and look at a professionally constructed plan and ask those questions at a single place, instead of 15 different places,” said Farrington. “They’re still the same decisions, you’re just able to streamline the process by which you bring all of those things together.”
However, PEPs may not be for every company. Farrington says that for employers that are willing and able to build their own plan, they would have less ability to tailor their retirement plans to their participants’ needs with a PEP.
“They would have to accept the construction of the PEP, whereas if they went on their own and wanted to apply the time, energy and resources to building their own plan they could have a certain level of customization,” he says. For example, if a company’s workforce skews on the young side and the majority of employees are from Generation Z, the employer may want to provide an investment menu that is more aligned with the demographics of the firm.
“Now you could likely go find a PEP that has some similarities to that,” says Farrington. “But if you’re building one on your own you certainly have more opportunity to customize a plan and you do forgo that a bit with a PEP.”
And most government- and church-run retirement plans are unlikely to be able to use a pooled employer plan because they are not governed by ERISA. Additionally, some plans that are suitable for PEPs may also be sitting on the sideline waiting for additional regulatory guidance, which has been limited so far.
“With PEPs being so new, it will be interesting to see how this segment of the market develops generally,” says Silverstein. “As more regulations and guidance are issued, we expect PEP adoption by other key players in the space. At that point, I think you will see more get involved, which will drive a lot more awareness and usage of PEPs.”
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