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Pooled Employer Plans Are Here—Will They Be the Next Big Thing?

Business Growth Strategies

The year 2021 is upon us, and with that, the SECURE Act’s much-anticipated pooled employer plans (PEPs) are coming online. Many firms have already announced that they plan to offer PEPs, but will they be a game-changer or slow to get off the ground? A recent report by Cerulli looks at some of the considerations.   

As of Jan. 1, 2021, registered Pooled Plan Providers can begin offering PEPs, allowing unrelated employers to participate in the same retirement plan without having to meet any common nexus requirement that had been the standard for multiple employer plans (MEPs). 

In the latest Cerulli Edge—U.S. Retirement Edition, the firm notes that although PEPs have received significant attention on their potential to transform the retirement plan landscape, several headwinds face this nascent industry, ranging from conflicting employer priorities to complex administrative requirements and a need for competitive pricing to gain traction. 

One such headwind that was not necessarily contemplated when the SECURE Act was enacted was the potential impact of a global pandemic. The report explains that small business owners frequently cite cost and the need to prioritize other benefits as obstacles to establishing a workplace retirement plan. Given that many small businesses are closing because of the pandemic, this concern rings true. “As individuals stress about caretaking, their own health, or their children’s hybrid learning schedules, retirement planning has taken a backseat to conversations about wellness and flexible work policies,” the report emphasizes.   

In this context, Cerulli anticipates that employers without a retirement plan will be reticent to join a PEP, and the solution will be “sold, not bought” for this cohort. The firm also notes that small business owners seeking to provide retirement coverage have no shortage of current options, from SEP and SIMPLE IRAs to competitively priced single employer plans, offered by firms looking to bundle recordkeeping services with fund management.

Price Points

Cerulli believes that pricing will be key to winning new business in this market. When asked to consider their biggest obstacles in providing a retirement plan, small business plan sponsors with fewer than 100 employees most often cited issues related to cost—whether total benefits spend (79%), employer contributions such as match (69%), or costs associated with plan administration and compliance (64%).

“With all the different provider roles at play in a PEP—from the PPP/3(16) administrator to the 3(38) fiduciary in charge of investment selection, recordkeeper, and independent trustee—multiple layers of involvement will likely drive up total cost,” the report contends. Cerulli notes that some stakeholders worry this situation could create a dynamic of “winners” and “subsidizers” within a given PEP, prompting relatively larger employers to maintain individual plans instead. 

Moreover, providers anticipating a “winner-take-all landscape” may come to market with aggressively priced/subsidized solutions to quickly establish a presence in the PEP market and build scale, the report further observes. And while PEPs have been touted as a cost-saving measure, the firm notes that it remains to be seen how their price point will compare with single employer solutions aimed at the small plan market. 

In addition, Cerulli cautions that the DC marketplace is “notoriously fee-sensitive and fiduciary-aware,” and 2020 was a busy year for ERISA class-action lawsuits taking aim at administrative or investment-related fees. While these lawsuits have typically targeted “mega” 401(k) plan sponsors, the report points to a trend of litigation extending down-market to smaller plans, 403(b) plans and MEPs, signaling that multiple employer arrangements like MEPs and PEPs may represent a more significant area of focus for lawsuits going forward. And in this context, providers—including plan administrators and consultants—have been the named defendants. 

As for those employers already offering a DC plan, a survey conducted by the firm in the fourth quarter of 2020 found that one-quarter of 401(k) plan sponsors are “somewhat or very interested” in joining a PEP. And even though PEPs were touted as being more for small businesses, the report notes that this sentiment is fairly consistent across plan asset segments, except for the “mega” market comprised of plans over $1 billion. 

Cerulli notes, however, that “micro” plan sponsors with less than $5 million in plan assets are most likely to say they have no opinion on the topic. This suggests that further discussion is warranted to educate startups and other small businesses about the full universe of retirement plan options, the report observes. 

Among those respondents contemplating PEPs, two-thirds indicate that the simplification of plan

administration and compliance are very important factors in their decision-making process when evaluating PEP solutions and providers. For plan sponsors with an opinion on PEPs, more than three-quarters prefer to stay involved in the investment selection process. A similar majority feel their 401(k) is already competitively priced. 

Pooled Plan Providers

Meanwhile, Cerulli notes that most retirement providers are still undecided about whether to participate in PEPs and few are committed to acting as the Pooled Plan Provider (PPP). The firm observes that that recordkeepers and third-party administrators with existing MEP business are a logical fit to accommodate these plans, but many providers have taken a “wait and see” approach. 

A Cerulli survey of DC recordkeepers conducted in third quarter of 2020 in partnership with The SPARK Institute found that nearly half of respondents perceive MEPs/PEPs as a “moderate or significant” growth opportunity. Only a handful said they intend to act as a PPP, but more are open to the idea of entering the PEP market if approached by existing plan sponsor clients or their consultant/advisor partners, the report notes. 

Additionally, the firm notes that some recordkeepers have expressed hesitation when it comes to the PEP service model. One research participant suggested that their firm’s engagement with PEPs will depend on the DOL’s Prohibited Transaction Exemptions. Other providers indicated they are leery of having to register as a PPP with the DOL, the complexity of reporting requirements and the potential for lengthy audits.

For additional insight into pooled employer plans, a feature article by Judy Ward in the Fall 2020 issue of NAPA Net the Magazine  looks at five of the uncertainties currently surrounding PEPs.