The State of PEPs and What to Expect in 2024

Aon announced Tuesday that its pooled employer plan, Aon PEP, has reached a milestone of $2 billion in 401(k) assets under administration and commitments since its inception in 2021.

That pot of assets was built around more than 70 participating employers and 50,000 employees, according to Aon’s announcement. The participating workplaces come from a range of industries, including biotech and life sciences, manufacturing, consumer products, energy and technology, according to the provider.

Aon attributed the relatively rapid growth of its PEP to lower costs—“potentially half” of other plans—reduced time commitment from human resource staffing, “improved governance” and “high-quality retirement planning options.”

The news follows Ascensus’ announcement in September that it has more than $1 billion in assets under administration in 30 pooled employer offerings, and Paychex Inc. reported a doubling of plan sponsors in its PEP over the past year to 25,000, though it declined to give assets under administration.

“Interest in and adoption into PEPs has grown significantly this year as advisers recognize this as a vehicle to create efficiencies for their practices and as a means of mitigating their clients’ fiduciary liability,” says Jason Crane, Ascensus’ head of retirement distribution. “Our solutions are resonating with employers across multiple segments and plan complexities as judged by the varied profile of adopters.” 

According to Kevin Delaney, vice president of business development at Retirement Solution Group, which works with a payroll company PEP as a 3(38) and 3(21) fiduciary, PEPs have seen tremendous growth this year due to plan sponsors looking to payroll providers for retirement plan services

“We are not seeing a huge uptick in single employer plans wanting to go to a PEP, but we have seen more curiosity amongst audited plans,” he says via email.

Kevin Gaston, director of plan design at Vestwell, says the marketplace has promoted PEPs since their inception in the Setting Every Community Up for Retirement Enhancement Act of 2019, and they provide a number of potential benefits to the right employer.

“The most common [approach to PEPs by plan sponsors] is a lot like backdoor Roth: they have heard a lot about it and potential benefits, but don’t know how they actually work,” he says via email. “We have had a number of communications with our own plan sponsor clients in 2023 to help them understand if they should consider a PEP or a single employer plan.” 

What to Expect in 2024

On expectations for PEP growth in 2024, Gaston says it’s a “momentum game,” with existing PEPs that have the right distribution poised for additional growth. He says PEP offerings in novel spaces, such as in 403(b) plans, will also be interesting to track.

“A strong tailwind will always be the potential cost savings when a large plan filer can have their audit inside of a PEP,” he says.

However, Gaston also notes the “potential headwind” from February Department of Labor guidance that limited a potential advantage PEP participants had hoped for. PEP boosters had hoped to avoid audits, but the guidance kept the threshold at which an audit is required at 100 participants, instead of raising it to 1,000.

“There is an expectation that a number of plans will leave audit status in 2023 onward, combined with the clarification that a PEP is subject to the same audit size rules (100, not 1,000) that other MEP plans must follow,” he says.

Delaney mentions that PEPs will continue to grow in 2024 because of the “hands-off” benefits they offer plan sponsors, as well as the outsourcing of liability. He also expects them to take advantage of audit costs being taken on by the pooled plan participants when possible—especially for plans that barely cross the 100-participant threshold that requires an audit.

More existing plans are exploring PEPs than startup plans, Delaney says, although some advisers have created their own PEPs so they can offer them for startups or in states where there is an active retirement plan mandate.

Gaston, meanwhile, says startup business for PEPs is out there as well.

“For the startup plan side, we see employers who are looking for a streamlined offering gravitating to a PEP vs. a stand-alone plan,” he says. “As a move to a PEP still has a lot of moving parts, as a whole, we see more conversions (new business) considering a PEP vs. [existing plans].”

Challenges Ahead

Gaston believes several stumbling blocks still remain for PEPs. For example, as PEPs grow, the odds that an employee will move between employers inside the same PEP also rises.

“These participants may effectively end up at the new employer already eligible and vested, adding complexity to eligibility, along with the possible chagrin of the employer, who may not appreciate a new employee being vested with service not earned in that company,” he says. “Other questions, like long-term part-time [employees] … will have challenges tracking between employers.”

While a PEP can help with fiduciary responsibilities, it cannot remove plan fiduciary responsibilities and liabilities completely, Gaston notes.

“Employers may mistakenly believe they can ‘offload’ all of their duties under ERISA; they cannot,” he says. “Specifically, 3(43)(B)(iii)(I): ‘The employer must retain responsibility to select and monitor on an ongoing basis the PEP (and named fiduciaries in that PEP) they choose to join.’”

Ascensus’ Crane adds that RIAs, by and large, were quick to support PEP solutions, particularly when working with an organization like Ascensus that offers to act in a pooled provider plan capacity, but others were not as quick to adopt PEPs.

“Some broker dealers and wire houses have taken a wait and see approach, though, having witnessed broad appeal and increased adoption, appear more inclined to consider making programs available for their advisors to distribute,” says Crane. 

Delaney also finds that PEPs still have some limitations, as fees are not necessarily lower—especially for non-audited plans—due to the additional service providers that need to be involved. That could limit their long-term potential.

“Sometimes, there are limited plan design options, depending on the 3(16)/TPA,” Delaney says. “There remains [more] autonomy and customization of plans for single employer plans [as compared with] PEPs. As PEPs grow and mature, the fees and conflicts of interest will become areas of focus for lawfare. For example, can the [pooled plan provider] also be the 3(16) and the TPA? Or can the 3(16) also be a 3(38) and 3(21)?”