Expanded Plan Access
Art by Yogee Chandrasekaran
At the end of last year, all eyes were on the Setting Every Community Up for Retirement Enhancement (SECURE) Act and its authorization of a new type of retirement savings vehicle, the pooled employer plan (PEP). Although similar in structure to multiple employer plans (MEPs), PEPs are different in that they remove the common nexus requirement and the “one bad apple” rule that disqualifies the entire plan over the actions of one employer. They also must be administered by an approved entity, called a pooled plan provider (PPP).
As we near the end of 2020, all eyes are again on the rule, as companies release plans for their PEP offerings. PEPs may start operating this coming January 1, but their PPPs must first register with the secretary of Labor and the secretary of the Treasury at least 30 days prior, requirements having been released by the Department of Labor (DOL) in mid-November.
It is no surprise that the retirement plan industry foresees great possibilities for these plans—notably for small to midsize plans sponsors. Some insiders say they expect, in time, that many such plans will join a PEP. “PEPs won’t take over the small plan universe, but this is big,” says Pete Swisher, president of Waypoint Fiduciary in Versailles, Kentucky.
Daniel Milan, managing partner of Cornerstone Financial Services in Detroit calls the new PEPs a “game-changer” for smaller employers. “These modifications [to MEPs] are so powerful that they completely change the quality and access for small businesses in regard to offering 401(k) plans.”
To offer PEPs, advisory and consulting groups have been creating partnerships with recordkeepers and third-party administrator (TPA) firms. In August, Lockton announced plans to launch a series of PEPs, initially in the Northeast and then nationally. For the Lockton Northeast (NE) Series PEP, Transamerica will be plan recordkeeper, Pinnacle, a Northeast Professional Planning Group (NPPG) company, will serve as the TPA, and NPPG Fiduciary Services as the pooled plan provider. Other firms have made similar announcements: The Mesirow Retirement Advisory Services (RAS) group is partnering with Newport Group to offer a new pooled employer plan next year, and Mercer plans to launch one then also, using Empower Retirement as recordkeeper.
“We view PEPs as being transformative for the industry,” says Clint Carey, head of delegated investment solutions at Willis Towers Watson in Chicago. PEPs will be able to embrace innovations found only in the large-to-mega end of the market, such as retirement income solutions or guidance on financial goals throughout a worker’s lifetime, Carey says. “We think this market will grow and evolve, and there will be many options among PEPs in the next few years that will allow employers to find the one that suits them best.”
The Appeal of PEPs Is More Than Cost
For now, advisers can, by doing a cost-benefit analysis, help plan sponsors weigh whether to join a PEP or to remain with or launch a single defined contribution (DC) plan, says David Swallow, head of consultant relations at TIAA in New York City. “Smaller plans can potentially reduce costs, but the PEP, in order to do so, needs to achieve scale.”
Cost might not be enough, however. Thomas Clark, a partner and chief operating officer (COO) with The Wagner Law Group in St. Louis, agrees that PEPs may not move the needle if sponsors and advisers focus only on cost efficiency. “We can already find cheap plans; that’s not going to be the mover,” he said at the virtual 2020 PLANADVISER National Conference (PANC) in September. “To me, what will make PEPs successful is if we get guidance from the DOL that makes the fiduciary footprint for plan sponsors smaller. For example, if there’s an administrative error that has to go through the voluntary correction program [VCP] and plan sponsors know PPPs will pay for that in all cases. Or, for example, if PEPs minimize the monitoring-of-service-provider requirement for plan sponsors.”
Potentially a larger benefit than cost, as Clark points out, is support with fiduciary obligations—a recognized plan sponsor need.
Some see PEPs as an extension of sponsors’ increasing dependence on outsourcing—both of 3(38) fiduciary investment oversight and 3(16) administrative responsibilities. “I think the transition that’s happening is that fiduciary duties are systematically being transferred from employers to service providers,” says Swisher. “We can see that in the evolution of 3(38); we can see it in the evolution of brokers becoming fiduciaries; we can see it in the rise of 3(16).”
Sources anticipate that, as PEPs grow more common, there will be a fiduciary responsibility for sponsors to assess them—and a tremendous opportunity for advisers to guide the process.
While the pooled plan provider that oversees the PEP and registers with the DOL will take on the fiduciary duty of running the plan, Swallow says, “there is no real magic bullet” that gets sponsors completely off the hook. They bear the fiduciary responsibility of selecting the PEP and of continuing to monitor how well it is doing its job, he says.
Aside from the benefits just examined, the increased ability to focus on one’s core business may motivate many businesses to join a PEP, says Preston Traverse, a partner and chief operating officer of defined contribution and financial wellness at Mercer in Boston.
Michael Duckett, vice president at Lockton, in Washington, D.C., agrees, noting that—even putting fees and fiduciary obligations aside—many plan sponsors will view the additional few hours a week to devote to their core business instead of to plan administration as a win.
On the other hand, a company may “want to maintain control over investments and/or vendor selection,” Traverse says. Advisers can help sponsors parse through this decision.
A further plus with PEPs is “there will be some flexibility for each sponsor on participation rules and vesting,” Swallow says.
Traverse concurs that some customization will be possible for PEPs at the larger end of the market, but he expects the small-to-micro plans to be “cookie-cutter.”
For that reason, advisers need to help plan sponsor clients decide whether they want to give up the ability to customize their plan, says Jeff Cimini, senior vice president of retirement product management at Voya in Boston.
“Some employers want to maintain control and advocate for their employees and to ensure all decisions are in their best interest,” Carey observes. “Then there’s the issue of branding. Many employers want to associate their retirement plan with [their company].” That will not happen with PEPs, he says.
Waiting for Regulatory Clarity
Another factor sponsors need to consider before offering a PEP is that the DOL still “has a lot to address in terms of regulations and guidance,” says Erin Turley, a partner at McDermott Will & Emery in Dallas. “Namely, the DOL needs to address conflicts of interest and how to align the incentives.” For instance, if an investment firm or recordkeeper is the pooled plan provider or offers a bundled arrangement, that could present conflicts of interest, Turley says.
Such unknowns alone, along with the “ability of fiduciaries to select their own compensation,” could delay broad-based adoption of PEPs until 2022 or even 2023, says David Whaley, a partner at Thompson Hine LLP in Cincinnati. “The DOL’s answer to these questions will drive how PEPs get delivered.”
Turley suggests sponsors also wait for the DOL to issue guidance regarding qualification rules on PEPs.
Despite what may seem like a rush from many companies to get ahead of the upcoming deadline, like all retirement plan issues, prudence and process are important. The advice Clark gives his clients is: “It pays for advisers to be looking at product offerings right now, but don’t feel like you’re going to miss the boat by taking a deep breath and making a decision in six, 12 or 15 months. It doesn’t make sense to be the first out of the gate.”