A Sept. 11 workshop session at the 2020 NAPA 401(k) Cyber Summit addressed some of the key considerations for the potential wave of new products and strategies involving open MEPs, PEPs and “group of plan” provisions under the SECURE Act.
One of the centerpieces of the SECURE Act, the new provision allows for unrelated employers to join a Pooled Employer Plan as part of an open MEP concept. But with an implementation date of Jan. 1, 2021, and the first PEPs set to go live, many questions remain unanswered—and that includes guidance needed from departments of Labor and Treasury.
Against that backdrop, industry thought leaders Joe DeNoyior, Managing Partner of Washington Financial Group, a division of HUB International, and Pete Swisher, Founder and President of Waypoint Fiduciary LLC, walked listeners through what’s new, what’s different and what you should do now.
Kicking off with an update on the current regulatory landscape, Swisher noted that the Department of Labor recently published proposed regulations on how to register to be a Pooled Plan Provider (PPP), which is critical for those who want to market a PEP. But one key thing that stood out to Swisher and DeNoyior was an estimate contained in the guidance that there would be 3,200 PPPs registering. This, they noted, was shocking at first, but after they began discussing the market potential and possible outcomes, they became less surprised.
Fiduciary ‘Cloud’
One important issue that still needs to be addressed by the DOL, according to Swisher, are questions about prohibited transactions. While not a problem with PEPs per se, there’s a problem with proceeding if you are a commercial entity that wants to sponsor a PEP. “In 40-plus years of ERISA jurisprudence, that has not been okay; in order to be a plan sponsor, you had to be an employer. You had to be completely independent. You couldn’t have any compensation and the law doesn’t actually change those rules. It just says a commercial entity can be the sponsor, but can the sponsor be compensated—this would seem to be an important point,” Swisher explained.
Swisher and DeNoyior expect that there will be guidance from the DOL that either says the old prohibited transaction exemptions apply or there will be some new exemptions or new guidance. They noted that in June the DOL issued a request for information on the possible parties, business models and conflicts of interest that stakeholders anticipate will be involved in the formation and ongoing operation of PEPs, and that the American Retirement Association submitted detailed comments in response.
This really leads into our understanding of what this may look like in the marketplace, notes DeNoyior. “Not only is there a need for the transfer of some of these fiduciary responsibilities, if not as many as possible, but this has been a desire that’s not new. We could just look at the growth in our industry alone of 3(38), 3(16), 3(21) and all the fiduciary rules.” He adds that, “It's not the end-all-be-all, but for some in the marketplace, this may be a great solution. We are starting to see now some of these larger entities starting to ask, how can I put up a larger wall between my organization, the plan sponsor and some of these fiduciary responsibilities.”
Change Energies
DeNoyior and Swisher also emphasized that there are powerful energies driving change in the retirement space today that have nothing to do with MEPs and PEPs, including the mass transfer of fiduciary duties, technology and automation, as well as the “three Cs”—fee compression, consolidation and business convergence. Moreover, they suggest that PEPs are prisms that can focus the change energies of the retirement system with your best ideas packaged, your firm’s concentrated negotiating power, a uniform message to customers and a delivery vehicle for your brand.
DeNoyior views these changes as not as a threat, but as an opportunity to get the best ideas through one place. “This is not just about employers and shielding themselves from fiduciary responsibilities or mitigating risk; this is about how we can impact as many Americans as possible to have access to retirement plans, to make it easier to offer them access to retirement plans, but then to also drive results through the plan design that we’ve all been talking about for the last 10 years,” he explains.
Market Potential
As for where they think the market is going, DeNoyior believes it’s going to be big, but he’s says that’s not to imply that it’s going to take over all plans, because it’s not right for every plan out there. “I think where it’s really going to go is when we get the design right, we get the appropriate vendors and partners together to create this, I think we’re going to start seeing this maybe slowly but surely take off—so a big bump in the beginning and then start to be a steady part of the actual solution.”
To that point, Swisher observes that if 8% of existing plans change vendors annually, and 25% of them change to a MEP/PEP, then 20% of today’s plans will be in MEPs in 10 years. What’s more, if 300,000 employers newly sponsor or join a plan in the next 10 years, and half of them do so in a MEP/PEP, then 50% of small plans and 35% of all plans are in MEPs in 10 years.
What should firms and advisors be thinking about when creating these plans? Swisher observes that it will be a slow grind and there will be a learning curve, but at the end of the day it’s about assembling partners who know what to put together. “There are partners out there who can help, and partners who are not experienced are learning, but fast forward five years, I think that this is going to be a dance whose steps we have learned. We're going to be good at it and it’s going to be easy to do a PEP,” he says.
Swisher suggests breaking the process into three categories: strategic, legal and practical. When thinking about strategy, he notes that one big question is: “Who owns this thing?” “If I’m the creator of one or if ‘own’ it, I need to have the appropriate legal team. I need to have obviously the right strategy, but there are so many different moving parts and it doesn’t need to be overly complicated. It just needs to be well thought out,” says DeNoyior. That conversation needs to happen if you’re thinking about bringing this into your practice, whether you’re a large RIA and aggregation firm, it’s really the first question you should answer, he notes.
As an aside, Swisher reminds that, from a regulatory “fishbowl” standpoint, if you have PEPs and MEPs and you’re a fiduciary, don’t say that you own them, because they are trusts and are owned by the participants and beneficiaries—but for business purposes, this is what people want to know.
Forks in the Road
DeNoyior and Swisher further explain that there will be some forks in the road to consider. The first fork is whether you will be a Pooled Plan Provider. Under a PEP, the PPP is the plan sponsor and you’re the one that’s ultimately in control of the program, and as such, you can be fired by virtue of employers leaving.
The second fork, they note, is whether you’re the distributor or you support the distributor. “In conversations of working on some of these, I think it really boils down to who’s a distributor, so either you’re going to bring it to the market and distribute, or you’re going to support the distributor,” says DeNoyior. “I don’t think there’s a right or wrong answer here; I think it depends on where the firm is, so if you’re with a really large advisory firm or with some large aggregators, you may want to actually create it and then also control some of the distribution,” he adds.
The final fork, according to Swisher, is what to outsource. “Another point learned in the course of being an early adopter to multiple employer plans is that there are some flops out there and you learn the lesson early,” he says, adding that you could put together a program, but without somebody to sell it, it will not move. Further noting that you need partners who know what they're doing, Swisher adds that there is not yet total clarity over what you’re allowed to outsource. “But I think we can safely assume for a variety of reasons that a very high level of outsourcing will be possible.”
