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READER POLL: What Are the Prospects for PEPs?

Industry Trends and Research

One of the most anticipated aspects of the SECURE Act—and one that has yet to take hold—is its “open” multiple employer plan structure, “pooled employer plans,” or PEPs. This week we asked readers to dust off their crystal balls and give us their take on the prospects for PEPs.

First we took a quick temperature read—and asked readers to pick one word to describe how they felt about PEPs:

31% - Ambivalent.

30% - Excited.

15% - Depends on the day.

12% - Nervous.

5% - Anxious.

5% - Eager.

1% - Scared.

One reader noted, “Nevin. You missed an important emotion, ‘Skeptical.’ While in concept this seems like a great idea, we’re still seeing a gap between plan sponsors and advisors who think this will save them money and record keepers who don’t see that this will be a money saving opportunity.”

Indeed, one word expressions weren’t enough to fully convey many readers’ sense of things. Here’s a sampling:

I think this is a good step for small plan sponsors and overall access to plans, but not likely to impact me personally a great deal.

Learning more and more too soon to tell.

I don’t think they will be anything other than a bump in the road.

In my small plan corner of world, the one plan, one plan sponsor arrangement works well if the advisor provides great service. There’s no substitute, and the added cost is justifiable. I don’t see PEPs gaining a foothold any time soon. I said that about email in 1990. Still, I’m ready for PEPs. My TPA is ready too, and we’re looking for opportunities.

I think this will be a great opportunity to help scale our business and potentially reduce cost for our clients.

Not sure how successful PEPs will be so I’m just waiting to see. I hear that some PEP are not really focusing on small plans but rather focusing on mid-market plans over $10M.

Whenever a new way to sell plans comes about it is an opportunity to increase my business.

The law is written to be too gray and will create a Wild, Wild West scenario, pushing out smaller advisors and tpas that cannot compete with large scale aggregation for fee compression.

Our industry didn’t need this. It is a really bad idea in my opinion.

I plan to use these a lot.

Concerned about the impact this may have on my business.

The only thing I believe it will accomplish is work as a 3(16) / 3(38) tool, which is already widely available. Everything I think I know about recordkeeping tells me that it will do very little to achieve some kind of magical “scale” for small plans, and why will you necessarily lock your large plans into a PEP?

I love the idea of the PEP and anything that might make it easier to cover more Americans with a retirement plan. Any time something new happens in our industry, someone will try to exploit it for profit without regard for the people. What concerns me is that the industry giants will likely create a giant PEP that they will end up offering for free and the independent recordkeepers and advisors who would take great care of the employers won’t be able to compete. I’m usually very optimistic by nature, but I’ve been around for a long time. :)

They will help move more small business to offering a plan and that is a good thing for the American worker, the retirement industry. So that is good. Will it take over the industry, I don’t think so and we will have to wait to see if it’s as cost effective as some people think it will be. It will be another tool in the tool box. Nice to have more tools!

Not sure how they are going to affect the market place and will they be more trouble than they are worth.

I think PEPs are a great idea, in theory. However, there are still too many questions that need to be answered around pricing, administration and how much liability the plan sponsor will offset.

It will be a non-event. 401k pricing has been squeezed so much already. What is the benefit to an employer to pool their 401k with another employer? I see very little benefit, besides maybe some fee relief on smaller plans, but then again, smaller companies tend to pay less attention to their k plan.

We are taking a wait-and-see attitude re: adoption or pursuit. Meanwhile, we are attempting to learn all we can about the PEP. We will either promote the concept or be selling/defending against it.

These could disintermediate the role of the independent advisor, be disappointing in their impact on coverage, or the biggest thing to hit the mid-market.

We have started an ‘Exchange,’ with a single recordkeeper, 3(16) TPA and fund lineup, which is virtually the same thing with less strings than the PEP. It is not a fit for all Plans and advisors who try to cram every square peg into a round hole will give the industry a bad name; that’s what makes me nervous.

I’ve managed Open-MEPs for several years now. This legislative clean-up of the rules to allow the PEP is a welcome change!

Having worked for a PEO that sponsored a MEP I am extremely skeptical that PEPs will provide the efficiency of scale that our government believes. You will have terrible average account balances and the larger sponsors in the PEP will unfairly subsidize the costs of the smaller sponsors.

Working for a B/D, it will depend on if we can make a PEP work with providers. With some of the current PEOs and MEPs, it is difficult to work with specific groups.

We will be putting together two, maybe more of them.

I see large aggregators going far downstream and trying to poach clients.

As a TPA at this point we have no immediate plans to sponsor a PEP. But will our clients decide they do want one (until the lack of flexibility in how they want their plan to run becomes apparent—and then it’s too late) and leave our services?

If there are roughly 5.5m businesses in the US, and less than 500k qualified retirement plans, the blue ocean is available, as opposed to fighting over the existing plans.

Just another bundled provider grab soon to produce disgruntled Plan Sponsors that have to unwind a bad service model. The ebb and flow of the industry!

Mostly, I feel like this will help overall retirement plan coverage increase and if done right will do so in a big way that mutually benefits participants, employers, and service providers.

Couldn’t care less.

I don’t think they will create the cost savings that everyone anticipates. There are already a handful of providers who have created low cost products for small businesses at making the PEP possibly irrelevant.

I think this will have limited impact on the market since it will be similar to the old Open MEPs which helped but did not change the market on a whole. It will help some employers offer a plan when they would not have offered one in the past.

Bad for plan sponsors as they’re unaware of the added compliance requirements and increased litigation risks.

Pandemic Pause? 

But here we are in the middle of a pandemic—and we had only just begun to get our arms around the CARES Act (with the PEP provisions) when everything changed. So, we asked readers what impact, if any, they thought COVID-19 might have on the implementation timing—and, for the most part, readers did see it having some impact—and mostly to slow it. 

35% - It will slow adoption AND implementation.

29% - It won’t have any (noticeable) affect.

17% - It will slow adoption.

7% - It will accelerate adoption AND implementation.

4% - It will slow implementation.

3% - It will slow adoption, but accelerate implementation.

2% - It will speed adoption.

2% - It will speed adoption, but slow implementation.

1% - It will accelerate implementation.

“People will be less likely to look at something new at this time,” commented one reader. 

But there was some pushback on the notion that COVID-19 would have an impact. “These rules and interpretations thereof will be up to time, not current events,” said one reader. “What does one have to do with the other?” noted another. Still another observed that “With business slower for part of the year, providers may have had more time to plan.” Another noted, “If a PEP is built lean and technology-heavy, utilizing the latest advances in the fintech space, it should be super easy to quote, sell and implement virtually, without trying to keep plan sponsors’ and committees’ attention for hours and hours over Zoom calls.”

But most of the comments were a bit more cautious: “In the short term—January of 21—most small business owners will be happy if they can have a fully employed business, workers can return to the workplace, I don’t think a fast majority of business will be running towards a PEP in Q1. COVID will have an effect that lasts into the new year. Once you get to Summer 21 I think things will move again quicker, and PEPs will start to be discussed.”

“On ‘Maslow’s hierarchy of 401(k) needs’ in a post-COVID world, I don’t think adopting or implementing PEPs will be high on the list. Primary concerns will be ensuring compliance with CARES Act distributions and revisiting fiduciary duties that may have flown under the radar while companies were trying everything just to stay in business. We’ll get there eventually, though.”

“I believe the states who mandate a retirement plan like California) with SB1234/Cal Savers) will slightly increase adoption rates.”

“Maybe a year or so. The focus will not be there.”

“I think folks won’t be looking into it so much until things get a little closer to ‘the old normal.’”

“Employers have businesses to sustain and may need to offload their retirement plan operations more than ever.”

Market Timing?

We also asked readers to dust off their crystal balls—to look out five years from now—and predict the impact of PEPs on the market… by assets:

34% - Between 5% and 10%.

26% - Less than 5%.

23% - Between 10% and 20%.

9% - Between 20% and 30%.

4% - Between 30% and 40%.

3% - Between 40% and 50%.

2% - More than 50%.

And we also asked how much of the retirement plan market would be in PEPs five years in now, by participant:

26% - Between 5% and 10%.

20% - Less than 5%.

19% - Between 10% and 20%.

17% - Between 20% and 30%.

9% - Between 40% and 50%.

8% - Between 30% and 40%.

2% - More than 50%.

“I think smaller plans will remain as they are,” said one reader. “I feel that smaller employers like to have control over the plan. And larger corporations, who are used to working on / with boards, like a board of directors, will be easy and comfortable with a broad design for controlling the plan.”

Although another commented, “Smaller employers (under 50 lives) will find this approach easier to navigate.” “It will appeal to smaller plans that are unable to capture the economies of scale imperative to their success from a cost structure standpoint, and I believe it will appeal to smaller organizations looking to streamline/offload more of the administrative burden, 3(16) will be a compelling element of the value proposition, said another. “We have gotten lukewarm feedback, at best, from clients who are larger (above $20 million), and who feel (substantiated) that they have already captured the economies of scale the market offers them. They don’t like the idea of being lumped in with other plans as an adopting employer, preferring their independence and autonomy. We believe PEPs will play a role in the industry, but the plan design and value proposition will not become the end all.”

“Probably not going to impact large asset plans,” said another. “Large plans already have economy of scale and can hire fiduciaries to help mitigate risk,” concurred another. “It is going to be the small Plans that will be tempted. Large plans already get lower pricing and better service,” noted another.

“I think take up will be mixed. A decent number of small employers will adopt PEPs, but not huge numbers. I also think a few small to mid sized employers will convert over to PEPs. Again, not a big shift but some.”

“It will be sold to small plans as ‘cost savings’ but I doubt that there will be any cost savings.”

“It took many years just to get plan sponsors to adopt auto enrollment and auto contribution escalation and many record keepers though that 404a5 was going to be a HUGE change and ramped up their call centers for the flood of calls coming from participants. It turned out to be a dud. PEPs, have not been designed the way a plan sponsor and advisor needs them so, it will take much longer than 5 years for this to grow.”

“Crystal ball is a little foggy,” acknowledged another reader. “If 2 or 3 out of 10 plans is a PEP I wouldn’t be surprised. If individual plans that can be customized are priced low enough and incentives to start a plan are still in place then I think an individual plan market will still be the more prevalent option. If PEPs really get the costs down and ease of doing business / starting up the plan are in place then it the % will be higher for the PEP.”

“Hard to imagine any mega-plans using a PEP, which is where the assets are. In the small/micro market it may work but will probably never be able to accumulate a lot of assets relative to the broader market.”

“I think the larger providers (Payroll, RIA, BD, Record Keepers, TPAs) will make a wholesale push to bring blocks of business together inside of PEPs.”

“These will predominantly be start up plans with negligible annual cash flow and high turnover so I don’t expect the assets to grow significantly in the first 5 years.”

“If small plans and startups are the biggest adopter, it will take a while to move the needle as far as assets go,” noted one reader. “5-10% in assets in 5 years since this will be primarily a small plan play. Even though there will be larger plans that may move to a PEP, those will be fewer,” concurred another.

There were, of course, skeptics. One noted, “Many of new and revolutionary retirement vehicles have tried and failed... this will be no different.” Another observed, “MEPs have never been terribly successful due to an inability to achieve scale (many MEPs start small and remain that way) and this should be a problem for PEPs as well.” One said, “I think it will take long than five years to really take hold. Some won’t have heard of it and some that have will want to hold back and see how it goes for others first.”

And yet another said, “It is up in the air how this will happen but if this Wild, Wild West scenario is successful there will be a big shift in plan provider design.”

“Again, the movement will be to a national retirement system so ultimately one retirement plan,” noted another. “The PEP is dangerous in my humble opinion because it is a step in the direction of a national retirement system,” agreed another. On the other hand, “LOTS of small plans and startups to go after!” shared another, while “I believe it will be slow to adopt, but once launched will present a good opportunity for our clients,” commented another.

Primary “Colors”

As long as they had their crystal balls in hand, we also asked readers to opine as to what they thought the primary  outcomes of PEPs would be five years from now:

30% - Expanded opportunities for SOME advisors and SOME TPAs.

20% - Consolidation of existing plan administration.

18% - Disintermediation threat for TPAs AND advisors.

9% - New plan adoption.

6% - Expanded opportunities for advisors AND TPAs.

3% - Expanded opportunities for TPAs.

3% - Disintermediation threat for advisors.

2% - Disintermediation threat for TPAs.

1% - Expanded opportunities for advisors.

“The issue will be pricing. Do you want to take on more plans at a reduced fee?” commented one reader. “Who is supposed to take the lead and aggregate their books of business to drive down fees? How else is this supposed to work?”asked another. “Those TPAs that have a good relationship with RKs that have a presence in MEPs will likely leverage that to create a PEP. Same goes for advisors that currently work with either TPA or RKs with existing MEP experience,” noted another. Another opined: “The consolidation will come from existing MEPs banding together to form PEPs.” Still another said, ”Wealth managers are likely to have the biggest opportunities here and PEPs will be adopted much more slowly by retirement advisors.”

Other Observations

Of course, it wouldn’t be a NAPA-Net Reader Poll without some great closing comments by our readers. Here’s a sampling:

I believe there will be a market for them and an opportunity for more small business to take advantage of the opportunity to offer their employee retirement programs.

I wonder how much consolidation there will be with exiting plans. One F5500 is compelling for many audit plans.

Once they work through the regulations and the hurdles I think in the future this will provide expanded opportunities, but will be slow in the early stages.

Scared for the future of our industry as the government seems to be creating a problem for only themselves to solve. Which never fares well...

I look forward to working with PEPs. The biggest hurdle will be pricing. Once the PPPs figure that out it will fundamentally change the retirement world. It will start with smaller plan sponsors and will eventually grow to larger companies.

I think record keepers will use these to try and capture significant volume of business but do so without having advisor involvement. That definitely creates concern for us and for participants.

I think it was eye opening on our recent NAPA call that every B/D with the exception of one said they were taking a wait and see approach to PEP and didn’t want to be first to market. Not surprised. Maybe COVID dampened the enthusiasm some but more of it is let’s get more clarity and see how it goes. Being second or third in this race will not be a bad thing.

I don’t believe they will have a huge impact. Technology providers will have a larger impact in the small plan space.

I believe the concept of a PEP, and the outcome they try to achieve by expanding coverage is a noble one. I believe where they fall short is execution; not dissimilar to some of the state run programs you see out there. Open MEPs/exchanges have been in existence for years, with minimal adoption rates. I don’t see how the PEP market all of the sudden drastically changes the game while turnkey, open MEP/exchanges with economies of scale already exist. The whole concept of a PEP is desirable for the following reasons: reduced fiduciary liability, ease of administration, economies of scale by pooling assets, amongst a few ancillary benefits. An exchange or open MEP does the same thing and they’ve existed for years. Lastly, advisors want control. Unless advisors can build a custom solution and brand it as their own, I don’t see PEPs working. Beyond building it, the most challenging obstacle is execution by virtue of scaling it. I see PEPs as potentially a home for very small start up plans, but something the plan sponsor will eventually outgrow.

Have you noticed how closely through the years and back into the 1980s, the U.S. debt aligns with untaxed retirement benefits?

I used to be really excited about the prospect. Then I delved deep into the MEP world and realized it’s not all it’s cracked up to be. I think too many advisors will use the PEP as a marketing ploy rather than a solution that is limited to who it will benefit.

The government’s belief that PEPs will enable and encourage more small employers to sponsor a 401k Plan is misguided. As usual, they fail to understand what drives administrative costs in the 401k industry. This will not deliver the results expected.

They’re good for the small plan market—smart and simple.

Will cause an increase in mega lawsuits as recordkeepers and advisors “partner.”

Impact of thoughtfully designed peps for the mid and large market will be surprising for many.

As the great PEP prophet JD Carlson once stated, "There is nothing a PEP can do better than a single employer plan."

I just don’t have time to worry about PEPs right now. I know they’re not going away, but maybe I can get by for another year or two without giving them serious consideration. And then at some point I think we, as TPA, will be forced to sponsor one.

The big question for me is whether wealth managers will recognize the opportunity for using PEPs with their existing clients who are business owners or decision makers for businesses that to date have not provided a plan due to cost or administrative burden.

We have a savings problem, not an accessibility problem.

PEPs will be pushed by advisors and recordkeepers/TPAs without true cost savings.

The industry is waiting for the key to PEP projections, perceptions, concerns, enthusiasm, etc.... what will PLAN SPONSORS think about them and will they take action?

Thanks to everyone who participated in this—and every—week’s NAPA-Net Reader Poll!

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