A little over two years ago, it became possible for unrelated employers to participate in a single retirement plan. These plans are called Pooled Employer Plans or PEPs.
There’s been a lot of conversation about whether PEPs are the future of employer-sponsored retirement plans, a nice alternative to the single employer plan, a better option than joining a state-mandated plan – or the worst idea anyone ever came up with.
You may also hear that they are a bust and aren’t gaining any real traction in the market.
You can often track the opinion’s source to those who will benefit from the angle being made in the argument. It’s only been two years and billions of dollars have transferred from single employer plans into PEPs. It may be too early to call them a failure.
PEP advantages
The advantages to an employer joining a PEP, rather than sponsoring their own plan, are pretty clear. This is especially so for smaller employers. As the PEP grows, all participating employers and their employees benefit from the economies of scale that come with larger plans. These include:
access to less expensive share classes of the plan’s investment funds
less expensive recordkeeping and administration
less expensive investment advisory fees
Large employers already benefit from their own scale. PEPs allow small- and medium-sized employers to also benefit by banding together for volume pricing. This, along with the federal start-up plan tax credits, can make a new plan have no net fees in the first three years and lower fees going forward. This reduces barriers for smaller employers starting plans and gives a superior, affordable option for employers in plan-mandate states that are willing to pay some fees in year four and beyond.
Everyone laments the coverage gap, which is primarily a small employer gap. PEPs provide another way to bridge this.
PEPs also significantly reduce the fiduciary liability on the plan sponsor compared to an employer sponsoring their own plan. Keep in mind, employers have a business to run. They are not experts in the rules and regulations that apply to retirement plans, nor should they be. To make them liable for rule violations, of which they are not aware, shouldn’t be expected to understand, and are not able to control, is a recipe for disaster.
Sure, the plan sponsor hires someone to administer the plan and (usually) an investment advisor, but rarely do these providers take full fiduciary responsibility for their work. The investment advisor may act as a co-fiduciary (3(21)) or 3(38)), but that doesn’t relieve the plan sponsor of liability. The co-fiduciary may go to jail with you, but they are not going instead of you.
PEPs are sponsored by a Pooled Plan Provider or PPP. The PPP either acts as the discretionary administrative fiduciary (3(16)) or appoints another entity to that role. The PPP hires the investment advisor, who acts as a discretionary investment fiduciary 3(38). These entities assume the liability for their services, not the plan sponsor. The plan sponsor maintains some liability for choosing the PPP via joining the PEP, but that liability is a lot lower than sponsoring a plan on their own. As the PEP market develops, we see PEPs appealing to medium and larger employers as well. Who wants to shoulder this liability just to maintain control?
PEP challenges
If we currently see a flaw in PEPs, it would be how they are being marketed vs. actually operated. Many large investment advisors have a branded PEP. It would appear that employers joining the PEP would have the backing of this large company for any liability issues associated with the PEP. But, when you peel back the structure, you often find that the actual PPP is a small company you’ve never heard of. Employers would be wise to understand the financial size of the PPP and whether there is any real ownership of liability beyond the E&O policy. The 3(38) liability would be covered by the big company (in most cases) but the administrative liability can be a bit deficient. Hopefully this will rectify itself through regulations.
Are they worth it?
It’s true that most PEPs limit some of the plan provision options for plan sponsors, such as distribution options, vesting schedules and input about the plan’s investment options. Do plan sponsors really care about these provisions, or do they have the options they have because they were told they needed to make a choice? Ease of access, reduced fiduciary and operational liability and better pricing may very well be worth the provision limitations.
All opinions expressed here are the judgment of the author and subject to change. This article is for informational purposes only and is not a recommendation. There is no guarantee that these statements, opinions or forecasts will prove to be correct.