Tracking the Evolution of PEPs

Retirement benefits are often cited as an important talent and retention tool for employers. But many small businesses lack the funds and resources to sponsor a traditional savings account, such as a 401(k).

Enter pooled employer plans, or PEPs. Established via the Setting Every Community Up for Retirement Act of 2019 and first allowed in 2021, PEPs allow multiple employers to join one plan, ideally resulting in lower costs, fewer administrative tasks and reduced fiduciary burdens for the employers. Nearly five years after their inception, they have started to find their footing in the marketplace, according to recent data and interviews with market watchers.

As an example, one of the first movers on PEPs, Aon, has more than 90 employers providing 401(k) and 403(b) benefits to more than 70,000 workers through PEPs, as of August, up from 70 employers and 50,000 employees it reported near the same time last year.

Meanwhile, providers such as The Standard and Ascensus have reported well more than $1 billion in PEP assets, and a number of new PEPs have been launched in 2024 by retirement plan advisories including the Alera Group, Hub International Ltd. and Strategic Retirement Partners. But while the place of PEPs in the retirement plan market seems clear, their future role in the market may be different from the Department of Labor’s original intention of reaching “small unrelated employers.”

The State of PEPs

The 2019 passage of the SECURE Act and the introduction of PEPs was the first time since the Employee Retirement Income Security Act of 1974 that the fiduciary obligation of a plan sponsor could be narrowed, says Dorothy Lank, a partner in the KLB Benefits Law Group.

“That’s a huge opportunity for employers,” Lank says. “Anything that reduces the fiduciary burden is helpful.”

Since their inception, PEPs have seen particular traction in the small business market, says David Kirchner, a principal in the benefits consulting group at Ropes & Gray LLP. But it has become clear that PEPs are not a one-size-fits-all proposition, and market differentiations are starting to play out. For example, some PEPs focus on setting up a first retirement plan for employers who have never offered one, while others require minimums of 100 to 200 participants.

The latter is perhaps the ideal prospect for a PEP, says Phil Senderowitz, a managing director at Strategic Retirement Partners who recently helped launch a new PEP. He says that, initially, people thought PEPs would be the easiest route for startup plans, but they are actually not a good solution for very small startups (such as those with three or four people) because of the recordkeeper costs.

“The true no-brainer is a plan that is on the cusp of needing to have an audit, so now 100 to 110 participants and growing,” Senderowitz says. “If you have reasonable balances, you can probably get some cost savings and you can avoid the burden of having the individual audit, which can be costly.”

Somewhat surprisingly, larger plans—ranging from $25 to $30 million—are also interested in PEPs because they do not want to worry about fiduciary responsibilities on a day-to-day basis, Senderowitz says.

Kirchner says PEPs that do well are generally those that understand their roles and responsibilities, have agreements with the participating employers that clearly outline those roles, have a strong onboarding process for employers and give those clients information about their process for vetting the various players they are hiring, like recordkeepers.

One of the early knocks against PEPs was that they are “sold, not bought,” says Ted Schmelzle, assistant vice president of retirement plan services at The Standard, which has roughly $1.6 billion of its assets attributable to PEPs. But employers are now starting to understand PEPs and ask for them, he adds.

“If you don’t have that PEP option in your briefcase, I think you’re going to be at a disadvantage,” Schmelzle says.

The Challenges

While PEPs have seen success, there are still growing pains.

“There really hasn’t been any guidance besides SECURE 1.0 and 2.0 on how PEPs are supposed to operate,” says Jack Eckart, a senior benefits consultant and Kirchner’s colleague at Ropes & Gray. “There’s still confusion over what exact roles pooled plan providers should play and where their responsibility falls compared to recordkeepers and investment advisers.”

Eckart explains that the PPP, recordkeeper, and investment adviser are all service providers within a PEP, and some PEPs have confusion among those providers as to who is responsible for certain items.

Separately, many advisers expected PEPs to revolutionize how much work they would have, Senderowitz says, but “just because a plan goes into a pooled employer plan doesn’t mean you can wash your hands of it.”

The biggest challenge PEP providers face right now is the education process, says Rick Jones, a senior partner in Aon’s retirement practice.

“There are over 700,000 individual 401(k) plans in the U.S. today, covering about 70 million private sector workers,” Jones says. “Having the necessary conversations to enable 700,000 of those plans to transfer into a PEP structure is not trivial.”

Moving forward, it will also be important to make sure employers continue to realize why they joined the PEP in the first place and what it gets them, Schmelzle says. PEPs are not a cost play, he says: What you get is the fiduciary and the administrative outsourcing—and that comes at a cost.

The Evolution

As PEPs move into their next phase, Jones says platforms more robust in both size and scale will be built to benefit savers and investors.

“With size and scale brings better purchasing power, which will benefit the whole system,” he says.

More specialized PEPs will also come to market, Senderowitz says. Some may develop with a minimum requirement of at least 200 participants or an average balance minimum. That does not necessarily mean employers of the same industry or type of company will pool together. But he expects the combination of, for example, 10 similar plans, each with $100 million, to get the pricing of a $1 billion plan.

Not all PEPs will survive, however; some may become unwound, leading to consolidation, according to Senderowitz. Smaller practitioners that formed their own PEP and did not get a lot of traction or participating employers, for example, may see recordkeepers raise prices, forcing them to move into larger PEPs.

“We’re still in the very early stages of what PEPs are going to look like for the long term,” Senderowitz says.

Correction: this version fixes terminology to cite the role of pooled plan providers.