Products April 20, 2021

July CEO Sees Promise in the PEP Marketplace

While there is still a learning curve when it comes to advisers understanding their role in the pooled employer plan marketplace, providers entering the space say the future is bright.

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It has now been nearly five months since the section of the Setting Every Community Up for Retirement Enhancement (SECURE) Act that established a new marketplace for pooled employer plans (PEPs) took effect.

Passed at the very end of 2019, the landmark retirement legislation set a start date of January 1 of this year for pooled plan providers (PPPs) to establish PEPs—subject to approval from the Department of Labor (DOL) and other regulatory stakeholders. In the time since, diverse PEP delivery models have already emerged, and more are coming online as the weeks and months go by.

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There are nuances in each case, but, in general, the emerging PEPs are expected to allow small businesses and other types of employers to band together to offer more cost-effective and less administratively burdensome retirement benefits to their employees. Naturally, sources say advisers should expect more questions about PEPs as the year unfolds and this new marketplace develops. Furthermore, advisers have critical questions of their own to ask about what the development of the PEP marketplace could mean for their own business practices and prospects over the long term.

Talking about his firm’s forthcoming PEP launch, John Humphrey, president and CEO of July Business Services, says the internal and external expectations are high.

“This is a project we have been focused on for some time, and it was a big focus of ours even during the pandemic,” Humphrey tells PLANADVISER. “In fact, during 2020, we also closed on the acquisition of an affiliate 3(38) fiduciary services provider that is now being baked into our PEP offering. It was really a dynamic year, and we are excited about what is coming next.”

The 3(38) provider July acquired was Summit Benefit Solutions, which was led by President Sheri Baker, who is now a partner and the chief financial officer (CFO) at July. 

“Sheri’s enterprise came along with a registered investment adviser [RIA] component as well, and so we have leveraged that entity as part of our PEP strategy moving forward,” Humphrey explains. “What this means in practice is that advisers can partner with our solution and they can rely on our 3(38) fiduciary management services, or they can plug their own 3(38) services into our solution.”

Humphrey says he expects the PEP solution will eventually prove to be attractive for both generalist advisers and those who have been closely focused on serving the retirement plan marketplace for years. However, in his view, there remains a relatively steep learning curve when it comes to advisers understanding their role in the PEP marketplace—and how they can work with PPPs effectively, efficiently and profitably.

“We feel the smaller plan segment, which is still very commonly intermediated by advisers, will remain our focus, and we believe that we can effectively partner with and support advisers in this space,” Humphrey says. “They can use the PEP solution as one way to more effectively serve the small-plan space. I really think this can be a win-win-win for the provider, the adviser and the client. Working together, we can deliver a better product for the small-plan marketplace.”

Humphrey says he is proud of the work his firm has done to get ready to launch its PEP, and he looks forward to engaging with the adviser community to help get more people invested in high-quality workplace savings solutions. He points to the firm’s recently redesigned digital enrollment experience as another success.

“At the end of the day, it has to be easy to enroll in a plan, and we know that we can use our technology expertise to make it easy and intuitive,” Humphrey says. “We have created new quick-enroll packages that allow people to easily identify and enter the right solution. They can customize their enrollment with tailored tips and support. It’s really a great solution that helps them get the most out of their plan.”

Data about the existing multiple employer plan (MEP) market collected as part of the 2020 PLANADVISER Recordkeeper Services Survey offers some context for Humphrey’s  projections. Though MEPs and PEPs have some key differences, sources say interest in MEPs is a reasonable proxy for forecasting the kind of early interest providers could see for PEPs. 

The PLANADVISER data shows responding recordkeepers (who collectively work with the vast majority of U.S. retirement plans), currently operate more than 3,600 MEPs, run on behalf of nearly 30,000 employers and 1.4 million participants. Looking at the asset sizes of the individual adopting employers is an eye-opening exercise, showing that interest seems strongest in the sub-$1 million and sub-$5 million categories. But there are quite a few employers in all asset ranges that are in these MEPs, and, in fact, the data shows something of a barbell distribution, with several thousand large employers participating in MEPs today.

Sources says the idea that PEPs could be cheaper than traditional single-employer retirement plans is appealing to many small plan sponsors. Additionally, at least in his experience, Humphrey says a significant share of demand for PEPs is going to come from plan sponsors that simply want to offload the responsibility of running and monitoring the retirement plan.

Compliance April 19, 2021

Lawsuit Challenges Fees in Kimberly-Clark’s 401(k) Plan

The plaintiffs allege plan fiduciaries used what it calls ‘cobbled-together services from many providers’ and didn't monitor fees for any of them.

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Participants in the Kimberly-Clark Corp. 401(k) and Profit Sharing Plan have filed a proposed class action Employee Retirement Income Security Act (ERISA) lawsuit against consumer products manufacturer Kimberly-Clark, its board of directors and its benefits administrative committee.

They allege that the defendants breached their fiduciary duties by authorizing the plan to pay unreasonably high fees for retirement plan services (RPS). The lawsuit asks that the court require the defendants to make good to the plan all losses resulting from their breaches of fiduciary duty.

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According to the complaint, the plan has more than 16,000 participants and assets of approximately $4 billion, which gave it substantial bargaining power regarding the fees and expenses that were charged against participants’ accounts. The plaintiffs say the defendants failed to monitor the RPS fees paid by the plan to ensure that they were reasonable and failed to adequately disclose fees associated with the plan to participants.

The lawsuit says prudent plan fiduciaries ensure they are paying only reasonable fees for RPS by soliciting competitive bids from other service providers to perform the same services currently being provided to the plan. It contends that this is not a difficult or complex process and is performed regularly by prudent plan fiduciaries.

The complaint also says a hypothetical plan fiduciary must remain informed about overall trends in the marketplace regarding the fees being paid by other plans, as well as the RPS rates that are available, and that the only way to determine the true market price at a given time is to obtain competitive bids through some process.

The plaintiffs argue that this competitive bidding process does not require a retirement plan sponsor to change RPS providers. “If the fees charged by the incumbent RPS provider are higher than the bids solicited from competitors then the prudent plan fiduciary negotiates with its current provider to ensure that the fees are reasonable. In virtually all cases, the incumbent RPS provider will reduce its fees to match the bids of the competitors,” the complaint states.

If the incumbent provider refuses to reduce its fees, then the prudent plan fiduciary moves to a new one that can provide the materially the same level and quality of services at a reasonable fee, the plaintiffs say. They contend that switching to a new provider that charges a reasonable fee is not a difficult process and it indisputably benefits participants.

“More than 30,000 plan fiduciaries switch RPS providers every year. All RPS providers have dedicated teams to assist plan fiduciaries through the process. There are no additional transition/conversion fees charged by the new provider for large plans such as the plan,” the complaint states. However, the lawsuit adds that prudent plan fiduciaries recognize that any difficulty or inconvenience to the plan sponsor in the context of switching to a new provider is not an appropriate consideration for a plan fiduciary acting for the exclusive interest of plan participants.

The lawsuit takes issue with Kimberly-Clark’s service provider arrangement. Instead of using only one provider, it says the defendants “cobbled together services from many providers, which often leads to a duplication of services and higher fees with no additional benefit to plan participants.” The complaint listed 10 covered service providers for the plan, and said the defendants failed to regularly monitor fees for any of them.

“An analysis of the plan’s 5500 forms reveals an inexplicable combination of duplicative service providers receiving excessive and unreasonable fees while plan participants did not receive any extra value to warrant the excessive and unreasonable fees,” the complaint states.

Not only did the defendants fail to regularly solicit quotes and/or competitive bids from covered service providers, but they did not have a process in place to ensure that the plan paid no more than a competitive, reasonable fee for RPS, the lawsuit contends. If there was a process in place that was followed by the defendants, the plaintiffs say, “it was done so ineffectively given the objectively unreasonable fees paid for RPS.”

According to the complaint, from the years 2015 to 2019, average annual RPS fees were at least $78 per participant. The lawsuit says a reasonable fee would have been $30 per participant, if not lower.

Kimberly-Clark says that as a matter of practice, it does not comment on litigation matters.

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