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The Current

NWPS thought leadership on engaging topics in the retirement plan arena.

The views and opinions expressed here are those of the authors and do not necessarily reflect the official policy or position of NWPS. Any content provided by our bloggers or authors are of their opinion and are not intended to be construed as a recommendation. This content is for informational purposes only.

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.

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Nearly three-quarters of the states have either implemented, passed legislation to implement or are considering legislation to implement state-run retirement plans. Companies over a certain size (and this can be as few as one employee depending on the state) must either offer a retirement plan of their own or automatically enroll their employees in the state-run plan. Employees can choose to opt out of the program at any time. The specifics for each state are different, which is confusing but understandable. Generally, these plans are automatic enrollment Roth IRA programs where the state either picks or hires someone to pick the investment options. They are simple and clean and meet their objective of offering everyone a workplace savings opportunity.

Critics respond to the plans

There is no shortage of news coverage deriding state-run plans. Many critics take exception to the lower contribution limits compared to an employer-sponsored, qualified retirement plan, the lack of access to financial advice, the lack of employer contributions, and generally, government involvement in private business. Some have even criticized the potential for people to lose means-tested government benefits if they accumulate too much in a state-run plan due to being automatically enrolled in the plan. We view these criticisms to be misguided at best.

Filling a gap

While there is no doubt that state-run plans are a poor substitute for employer-sponsored, qualified retirement plans, the simple fact is that many employers simply will not sponsor a plan for their employees.



Can we blame them? Why would you subject yourself to the liability, regulations that even the largest companies with the best experts assisting them can’t fully comply with, litigation risk (low but existent) – all while adding material expense per participant? The retirement and financial services industries have simply done a poor job of offering an affordable retirement solution to the smallest employers and the Department of Labor and the Internal Revenue Service haven’t helped with the cost of the regulatory burden that gets passed on to the employer or employee. By the time the recordkeeper, TPA and investment advisor get paid, you are looking at real expense. The states are trying to solve this product gap. Sure, there now is a tax credit to help offset start-up expenses for new plans, but it only lasts three years. Who is going to pay for year four? Pooled Employer Plans may be the solution as they gain traction and scale, but there is also no shortage of detractors towards PEPs in the retirement space. All we hear about is the coverage gap but then deride solutions working to narrow it. One could be forgiven for thinking that perhaps the criticism is borne from protectionism. Is this founded?

“While there is no doubt that state-run plans are a poor substitute for employer-sponsored, qualified retirement plans, the simple fact is that many employers simply will not sponsor a plan for their employees.”

State-run plans are not perfect, but as Voltaire said, "Perfect is the enemy of good." They are better than nothing and a step forward to solving the coverage gap for smaller employers. If we as an industry do not like them, then let’s come up with an affordable option that is better.

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.

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A preventable situation

We were recently contacted by someone who worked for one of our clients. She is now responsible for the 401(k) plan at her new employer. The national recordkeeper her new employer uses for their plan recently removed the stable value fund that their plan used as its capital preservation option from their list of available options. Their investment advisor worked with them to choose a new stable value fund and the assets moved from the old to new fund. Well, most of the assets moved. Why most?

The book value (what participants are guaranteed) was less than the market value (what the plan is guaranteed), so a market value adjustment (MVA) happened. The MVA is the difference between book and market value. In this case, it was more than $200,000. Either the participants incur this as a loss in a fund that they are told doesn’t lose money or the employer would need to make the participants whole. None of this was discussed with the employer beforehand – even though the recordkeeper forced the move and the advisor facilitated the new option. This seems like a pretty big miss.

Should the participant pay?

The market value of nearly all stable value funds is below book value right now. This happens when interest rates rise. We have been in a declining interest rate environment for so long, it seems people have forgotten about MVAs (or they weren’t of working age the last time rates were going up). As long as a plan stays with its current stable value fund, this really isn’t an issue since participant-initiated liquidations happen at book value. Plan-initiated liquidations trigger the MVA. It doesn’t seem like the participant should be on the hook for these.

Plan-initiated liquidations are generally caused by a decision to change stable value funds or recordkeepers. Many recordkeepers in the insurance industry have proprietary stable value funds they will not allow to be another recordkeeper’s platform. It’s a pretty slick way to keep you as their client. Though, you can avoid the MVA with proper planning and execution.

A way to avoid MVAs

Stable value funds will normally waive MVAs if you give 12 month’s advance liquidation notice. It’s pretty simple to pull this off with a fund change but more difficult with a recordkeeper change. Still, it is possible if the new recordkeeper is willing. When the assets move from the current recordkeeper to the new one, that stable value fund’s assets are left behind for 12 months. During those 12 months:

  • All new cash flows (contributions, transfers) are invested in the new stable value fund.

  • Participants continue to receive the old stable value fund’s credited return.

  • Participants receiving a distribution or who transfer out of the old stable value fund will still receive book value and the money will be wired from the old provider to the new one.

  • When the market value reaches book value or 12 months have passed, the old stable value fund is liquidated and assets are transferred to the new one.

This may seem clunky, but it really isn’t that bad and is preferrable to staying another year with a recordkeeper you want to leave. Keep in mind, any current service issues will likely get worse if you tell your recordkeeper that you are leaving in 12 months.

It may be easy to miss the effect of rising interest rates since we haven’t seen them for a long time – until quite recently. Like most things we haven’t seen before, it is prudent to carefully evaluate seemingly routine decisions in a new environment.

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