Pooled Employer Plans: New Frontier for DC Marketplace

By: Randy Myers

Pooled employer plans, or PEPs, are finally here—and some retirement industry executives believe they may redefine how employers offer defined contribution retirement savings plans to their employees.

PEPs became legal in 2020 following passage of the SECURE Act of 2019. They are similar to multiple employer plans (MEPs) with one key distinction. Unlike MEPs, PEPs do not require participating employers to be members of a group or organization sharing common interests beyond a retirement plan. So, participants in a single PEP might run the gamut from manufacturers to restaurant operators to car dealers to medical practices. PEPs are expected to be created and operated by a diverse range of “pooled plan providers,” including payroll providers, third-party plan administrators, professional services firms and financial services firms, who are willing to assume the fiduciary responsibilities that go along with that role.

Aaron Chastain, senior investment consultant and head of DC multi-asset solutions manager research for Aon, a professional services firm that has launched its own PEP, is among those who believe PEPs will become a dominant force in the DC marketplace.

“We think PEPs will redefine the landscape, similar to what happened when 401(k)s were introduced and transformed the overall retirement and pension landscape,” Chastain said during a panel discussion at the 2021 SVIA Spring Seminar.

Preston Traverse, partner and DC mid-market solutions leader with professional services firm Mercer—which is planning to launch its own PEP this year—said PEPs could help employers address a number of challenges related to sponsoring a retirement plan, including the risk of litigation and the pressure many face to do more with less.

“When you enter a PEP, you can potentially generate lower fees for participants, lower planning costs for plan sponsors, get access to a wider range of efficient and diversified investments, expand retirement plan access, decrease administrative burdens, and possibly mitigate fiduciary risk,” said Traverse.

Jason Crane, head of retirement distribution at financial services firm Ascensus, which acts as a recordkeeper and third-party administrator for retirement, education and health savings plans, also sees much promise for PEPs, though he is more guarded about their potential impact.

“We think PEPs are terrific, every bit as much as MEPs that came before them,” Crane said. “But I’m not yet sold on the fact that PEPs are going to change the landscape of the retirement industry.”

Crane said that while PEPs may prove popular among some employers who sponsor mid-size retirement plans, he expects they’ll appeal most to companies at the small end of the market—those with plans ranging from startup level to about $5 million in assets. Smaller employers are more likely than large employers, he said, to be comfortable with a prefabricated plan and to gain efficiencies of scale in a PEP that they couldn’t secure by themselves. Larger employers can achieve economies of scale on their own due to the size of their plans. By offering their own plans, larger employers also have more flexibility to customize them to their specific needs.

Chastain agreed that smaller employers have been among the earliest adopters of PEPs, but observed that Aon has “seen the pipeline in the $100 million-plus market develop quite robustly,” too. Sponsors of plans that size, he said, are interested not only in potential cost reductions but also potential work reductions if the PEP provider can assume more plan responsibilities. On that score, Beth Dickstein, partner and co-leader of the global benefits practice for the law firm of Sidley Austin LLP, noted that employers using a PEP would no longer be required to file an annual Form 5500 with the Internal Revenue Service, since the PEP would file a single Form 5500 for all of its participating employers.

Mercer also has detected interest among mid-size employers, Traverse reported. “In terms of the opportunity we’ve seen, the average plan size is about $130 million, ranging from $10 million to $15 million and up to $500 million to $600 million,” he said. “Above that, we’ve had a lot of meetings and great conversations, but those larger plans already have the scale needed to achieve pricing efficiencies. And as mega-sized plans, they’re already getting a lot of additional services with recordkeepers.”

In terms of the types of employers showing interest in PEPs, Traverse said they’re not distinguished by the industry in which they operate. Rather, he said, most tend to have HR departments that are under some type of stress. “They might have had an issue with an existing vendor, they might have had trouble during an audit, maybe they’ve had people leave the HR department, or maybe they want higher-quality institutional investment options, Traverse said. “But there’s usually some sort of catalyst.”

Considerations for stable value providers
Chastain said most PEPs are likely to offer only one stable value investment option for many of the same reasons most retirement plans offer only one—simplicity, and the restrictions most stable value funds impose around trading into and out of competing investment options in a plan. Some PEP providers may offer their own stable value funds, Traverse said, while other will select an independent provider, which is the route Mercer is taking.

Chastain predicted that most PEPs will enforce stable value put options at the plan level rather than at the level of the individual employer participating in the PEP. A stable value put option specifies how a plan can exit a stable value commingled fund at contract value, subject to a specified notice period. Put options also can spell out how a stable value manager can remove invested assets from a fund at contract value for purposes of funding plan-initiated withdrawals during the notice period. Chastain said his firm is advising clients whose plans have a stable value fund with a put option, and are considering moving to a PEP, to “get the clock started on that put soon.”

Asked whether a PEP might choose not to use a stable value pooled fund if it required administration of a 12-month put at the employer rather than the plan level, Chastain speculated that it might be a consideration for some PEP providers.

Dickstein added that for stable value investment managers, serving as a manager for a PEP won’t be much different than serving as a manager for any other plan. However, she said, managers may come under additional pressure from PEP operators to lower their fees.

Crane suggested that however the PEP market develops, it will remain in competition with single employer plans. “For stable value providers, there’s still an opportunity to place your eggs in a number of different baskets,” he concluded.

Watch the full presentation here