PEPs’ Slow Growth

Art by Melinda Beck

Nearly three years since the Setting Every Community Up for Retirement Enhancement Act passed, the adoption of pooled employer plans, which the act enabled, is still waiting to take off. 

The slower than expected pace reflects several headwinds faced by small businesses—the market the SECURE Act had targeted to boost retirement plan access for the employees. Many such businesses, research shows, put retirement plan initiatives on the back burner, as PEPs launched in 2020 during the pandemic’s troubled economy, and have kept them there due to recession fears and inflation concerns.

“Small businesses had just been trying to stay [viable] and keep their doors open for the past few years,” says Frank Zugaro, head of Huntington Private Bank’s retirement plan services business, in Akron, Ohio. “We’re just starting to see them come out of that.” 

Still, more than half of small employers surveyed by the LIMRA Secure Retirement Institute in May said they are interested in learning more about PEPs. 

A possible reason the uptake of the plans has been moderate at best has been a proliferation of other options that also deliver low costs and lighter administrative duties to providers, Zugaro says. Those include both new offerings from fintech startups and more competitive options from existing recordkeepers.  

“Some of the recordkeeping firms changed their strategy and said, ‘Well, let’s offer a more competitive product and provide 3(16) service along with our recordkeeping service,’” Zugaro says. “The cost of 3(16) as a bolt-on service has come down significantly over the past three years.”

“Some of the recordkeeping firms changed their strategy and said, ‘Well, let’s offer a more competitive product and provide 3(16) service along with our recordkeeping service.’”

Unrealistic Expectations 

Michael Doshier, a senior retirement strategist at T. Rowe Price U.S. Intermediaries in Baltimore, says the pace of adoption is what he thought it would be. 

“You have a lot of people say they’re surprised [the strategy] hadn’t done more than it had in the first year and a half, but they may not have had realistic expectations,” he points out. “If you look at the number of registrations and some of the flows, it’s absolutely gaining traction. And I think that’s going to continue.” 

In seeming agreement with his assessment, about one in five consulting/advisory firms currently offer or are developing a PEP, and another one-third say they are considering it, according to the T. Rowe Price 2021 Defined Contribution Consultant Research Study. 

Meanwhile, adoption is slowly picking up as sponsors with some other types of plans continue to look for ways to lower their costs and reduce the administrative burden, also as employers without a plan seek cost-effective ways to enhance their value to potential workers in a competitive labor market. 

Adviser firm OneDigital especially sees interest from clients in the latter group, says Kirki Fuller, a senior retirement plan consultant for the firm in Richmond, Virginia. Many existing plans have a unique design that does not work easily within a pooled employer plan structure, she explains.

OneDigital offers two PEPs, one for small firms—i.e., under $3 million in plan assets and fewer than 100 plan participants—and one for larger organizations.  

Beyond now being able to hold out a plan to attractive job candidates, the small employer has a further incentive. “We’re seeing more activity concentrated in the startup plans because of the tax credit,” Fuller says. 

Under the SECURE Act, employers setting up a retirement plan for the first time may receive a tax credit of up to $5,000, with an additional $5,000 if they implement automatic enrollment.  

Fuller says the asset size of some of the small-employer plans has grown more quickly than expected, as executives within the plan roll in existing assets they had from former plans. 

“We’ve seen some cases where the startup plans were over $2 million in less than a year from rollovers at companies with a big C-suite,” Fuller says. “It’s been a nice fit for them, as far as looking at their full benefit package and what they can offer their employees.” 

New Use Cases 

As interest grows, PEPs have been evolving, to better meet plan sponsor clients’ participants’ needs.  

An area of interest among larger OneDigital clients has been white-label plans designed for this market. For example, the firm has been talking to some franchises that have not previously offered retirement benefits to their franchisees but now see an opportunity to do so, via a PEP, Fuller says. 

Though having similarities to multiple employer plans, the white-label PEPs are different in that the pooled plan provider can customize design offerings, reporting and one-on-one retirement plan consultations beyond the traditional MEP offerings.  

Doshier says a similar potential use case is for private equity firms that are looking for a way to offer employees retirement benefits across their portfolio companies. Other PEPs are focusing their marketing efforts on states such as California and Illinois whose mandates require even small employers to provide retirement benefits. 

“As PEPs get more focused, to solve specific problems, that will be the foothold where adoption starts to accelerate,” Doshier says. 

That evolution will likely also include a shakeout among pooled plan providers as some amass enough assets for economies of scale to kick in and others exit the market. 

For its part, T. Rowe Price has been asked to provide asset management solutions for six different PEPs, Doshier says. In some of those, the firm provides the qualified default investment alternative, and, in others, the solution is another spot in the core lineup. As a recordkeeper, T. Rowe Price has implemented one PEP and has three more in process.  

Other Opportunities for Advisers 

Some advisers see the opportunity in PEPs, not in serving as a PPP but, rather, as an investment consultant to the plan itself. That is the approach that Huntington Private Bank has taken, Zugaro says.  

“We’re looking at which pooled plan providers will actually be able to stick around, and that’s a whole new market for us to go after from an investment advisory perspective as a fiduciary,” Zugaro says. 

There are other avenues for advisers to take as well, says Patrick Rieck, vice president product, retirement and private wealth at Hub International Ltd. in Milwaukee.  

“The adviser’s value proposition is becoming more plan governance, participant education, and advice,” he says. “Those are the types of things where the adviser is truly adding value. I think that’s the natural progression we have been seeing.” 

Hub does not currently have a PEP, but it is actively reviewing pooled plan providers to find one to partner with, Rieck says. “We think it’s important to have an option available to clients. But it won’t be the only solution we offer,” he notes. “This is a new market.”