Created under the 2019 SECURE Act and launching on January 1, 2021, Pooled Employer Plans (PEPs) provide benefits to employees of two or more unrelated employers. Retirement Director Ben Rizzuto explains how the plans differ from traditional Multiple Employer Plans and offers guidance on how financial professionals can continue to add value for plan sponsors and business owners who choose to adopt PEPs next year.
A 2018 study by the U.S. Bureau of Labor Statistics found that approximately 38 million private-sector employees in the United States did not have access to a retirement savings plan through their employers.1
Part of the SECURE Act of 2019 hopes to remedy this issue through the creation of Pooled Employer Plans, or PEPs. These plans will be made available on January 1, 2021, and will likely raise many questions for business owners. Financial professionals will also be faced with significant questions – namely, how to add value for clients within this new paradigm.
What Is a Pooled Employer Plan (PEP)?
To put it simply, a PEP is a type of open multiple employer plan (MEP) that is designed to provide benefits to employees of two or more unrelated employers. Unlike traditional MEPs, a PEP is treated as a single plan for ERISA purposes, allowing for streamlined administration and reporting. A PEP may also be sponsored by a bank, insurance company or other financial services firm.
While approximately 85% of workers at private-sector establishments with 100 or more employees have access to a retirement plan, that percentage drops to only 53% of workers at private-sector establishments with fewer than 100 workers.2 For that reason, PEPs should allow more small businesses to be able to provide retirement plans to their employees. Additionally, PEPs should allow plan sponsors who have sponsored their own single-employer plans in the past to band together with other small plans to take advantage of economies of scale and streamlined responsibilities.
Much of that responsibility transfer is due to the fact that these plans will be sponsored by a Pooled Plan Provider (PPP). The PPP will serve as the named fiduciary, the plan administrator and the party responsible for performing all administrative duties. This role could be fulfilled by one of the participating employers, but it is more likely for the PPP to be an unrelated entity, such as an insurer or financial institution. In many cases, the responsibility for investment management will be delegated to another investment fiduciary by the PPP.
Why Small Businesses May Want to Consider a PEP
In the traditional 401(k) model, an employer is responsible for plan design review, hardship and loan approvals, Form 5500 preparation and filing, plan document preparation, and QDIA notices, among other things. Along with that, the employer must select, manage and oversee its service providers, which include a record-keeper, investment manager, advisor, auditor and counsel. Furthermore, should any mistakes occur with any of these entities, the employer bears the full fiduciary responsibility for those errors.
Compare that to the new PEP model, where the employer’s fiduciary risk and administrative responsibility is limited to selecting a PPP, submitting accurate, timely payroll and updating changes. Along with that, since the plan assets are pooled, employers may be able to offer employees more services at a lower cost.
How Can Financial Professionals Provide Value within a PEP?
While PEPs undoubtably make small business owners’ lives easier, financial professionals may now find themselves in a situation where they’re not sure how they can bring value to these relationships. This is especially true in situations where investment selection has been offloaded to another fiduciary selected by the PPP.
One important thing to consider, however, is that adopting employers (AEs) continue to have some fiduciary responsibility with PEPs. The law relating to PEPs explicitly states that AEs are fiduciaries with respect to the selection and monitoring of the PPP and any other designated fiduciaries. Guidance and support with this responsibility is where financial professionals can play a role.
First and foremost, although the industry has known PEPs were on the horizon for the last couple of years, once January 1 rolls around, things will become very confusing for many business owners and plan sponsors. Having a financial professional to work with that can help navigate these new laws and providers may prove invaluable.
For example, business owners and plan sponsors will have to select and monitor the PPP and PEP fiduciaries, which opens up a number of different areas for review. One area will be fees and expenses. Just because assets are pooled doesn’t mean a PEP is going to automatically be less expensive, so AEs will still need to make sure the fees that they and their participants are paying are reasonable. In fact, research from Boston College showed that MEPs can be more expensive than a single-employer plan. The study, which investigated costs associated with MEPs using data from 2016 Form 5500 filings, found that these types of plan had an average administrative fee of 86 basis points compared to 32 basis points for single-employer plans. And among the five largest MEPs, total plan costs ranged between 69 and 124 basis points.3
The issue of cost is important because litigation has started to pop up in this area. In September of this year, a $2.1 billion MEP with 27,000 participants across 250 employers was sued for violating its fiduciary duties by charging excessive fees.4 So while one business may be a small part of the overall plan, it will be important for plan sponsors to be aware of the plan’s administrative and investment fees. If they are deemed excessive, it may warrant exiting the group plan.
Remember, fees are reasonable based on services rendered. Plan sponsors will need to consider what is being offered in the selection process as well as after becoming part of a PEP. Financial professionals can help lead the process of benchmarking services provided and offer guidance on service providers, features, benefits and other areas where they have expertise. This kind of support frees up business owners to focus on the day-to-day operation of their businesses, making it a great way for financial professionals to provide value to clients.
Guidance with Customization
While many duties will be offloaded, a PEP does allow for some autonomy on behalf of participating employers. For example, AEs will be able to make decisions on contribution levels, eligibility and vesting provisions, including what – if any – type of matching contribution will be made, when employees will become eligible to participate in the plan and how quickly deferrals will vest. These are all significant decisions, especially because they may be the most important factors plan participants consider when judging a potential employer and will also impact their longevity with a company and overall satisfaction with the plan.
Speaking of participants, their education may be another area where financial professionals can provide significant value. A 2020 study conducted by Bank of America showed that 62% of employers feel “extremely” responsible for their employees’ financial wellness – up from just 13% in 2013. That sense of responsibility grows even larger when considering employees’ retirement: 78% of respondents to the survey reported feeling “very” or “extremely” responsible for preparing employees for retirement income needs. The same was true for preparing employees for retirement health care needs, which increased from 22% in 2012 to 80% in 2020.
While most employers believe financial wellness programs are important, the Bank of America study found that a declining percentage of employees find the quality of these programs to be “good” or “excellent.” In fact, the percentage has declined from 61% in 2018 to 49% in 2020.5
Financial wellness programs go beyond just making sure participants understand details of the retirement plan. Budgeting, Social Security, Medicare, planning for health care costs, student loan debt management, physical and mental well-being and a host of other topics can fall within the bounds of a financial wellness program. In many cases, it takes a financial professional showing what’s available and possible to get these programs up and running.
All of the areas outlined above provide options for financial professionals to continue adding value for plan sponsors and participants within the new PEP paradigm. To help guide these conversations, following are some questions to ask plan sponsors and business owners.
- What are the needs and issues of your employees?
- How will you measure the success of the retirement plan?
- What level of fiduciary responsibility are you comfortable with?
- How much customization do you want for the plan?
- Are you comfortable delegating administration and willing to abide by others’ direction?
- Are you willing to potentially pay a premium for non-PEP services?
Plan sponsors and business owners have varying degrees of expertise regarding plan administration, operation and fiduciary responsibilities. PEPs may serve as an easier option to provide retirement savings opportunities to employees. While that ease of use may negate some areas where financial professionals have provided assistance in the past – such as investment selection or administration – there will still be facets of the plan where they can provide valuable assistance and guidance.
1U.S. Department of Labor. National Compensation Survey: Employee Benefits in the United States. March 2018.
3N. Shnitser. “Are Two Employers Better Than One? An Empirical Assessment of Multiple-Employer Retirement Plans.” Boston College Law School Faculty Papers, Spring 2020.
4Khan v. Board of Directors of Pentegra Defined Contribution Plan, Southern District of N.Y., Case No. 7:20-cv-07561.
5Bank of America 2020 Workplace Benefits Report.