Pooled Strength
Among the potentially sweeping changes the SECURE [Setting Every Community Up for Retirement Enhancement] Act ushered in is the authorization of pooled employer plans—or PEPs. These will offer a new way for unrelated employers to collectively participate in a 401(k) plan—not a 403(b) or 457(b) plan, though—that is professionally run and, thanks to economies of scale, could charge lower fees than do traditional plans.
This arrangement is a type of open multiple employer plan (MEP), meaning it covers employees of more than one employer. The PEP option will become available for companies to join starting this coming January.
By allowing the PEP to file a single Form 5500 and conduct one annual audit, the arrangement relieves much of the regulatory burden that has kept small businesses from offering retirement benefits, experts say. The pooled plan provider (PPP) takes on the role, historically held by employers, of plan administrator, serving as the main fiduciary of the plan and registering with the U.S. Treasury and Department of Labor (DOL).
“There’s no question that this is the most significant event to restructure the small-plan marketplace since the PPA [Pension Protection Act of 2006],” says Bradford Campbell, a partner with Faegre Drinker Biddle & Reath LLP, in Washington, D.C. “PEPs have the potential to be a very significant disruptor and change the way the small-business plan marketplace works.”
The advantages to small-business owners are well-known—the lower fees, plus access to more favorable pricing, as each owner no longer has to purchase services on his own. Still, there is no size limit for participating employers; therefore, adviser sources say, the actual impact of PEPs could be much larger.
“The focus on closing the coverage gap among small employers has been the headline for folks in Washington,” says Pete Swisher, founder and president of Waypoint Fiduciary in Lexington, Kentucky. “But [the regulation allows for] a useful plan design, so it’s going to be adopted by anyone for whom it’s useful.”
Swisher says he expects that a “significant minority” of the retirement marketplace will shift into PEPs over the next few years, including large employers. This is because even they may like the idea of moving some of their fiduciary responsibilities to the plan provider.
“Small employers will see a tremendous opportunity in joining a PEP because it’s a more turnkey retirement solution,” says Michael Conte, director of retirement product solutions for CUNA Mutual Retirement Solutions in Philadelphia. “But there’s also an opportunity for large employers to leverage the construct of a PEP to minimize costs.”
Some fiduciary responsibilities, of course, Conte says, will remain with employers, namely to select and monitor the plan provider, to remit participant contributions in a timely manner, and to deliver plan materials to participants. Still, with their most burdensome responsibilities removed, many employers could be willing to consider such a plan.
Favorable for Advisers
The potential for PEPs to become a huge market has many in the retirement industry ready to jump in.
“Everyone we talk to—financial advisers, 3(38) fiduciaries, 3(16) fiduciaries, recordkeepers, mutual fund families, investment houses, trustees—everybody is clamoring to participate in PEPs,” says Richard Rausser, senior vice president at Pentegra in White Plains, New York. “They’re all thinking they need, and want, to be a part of this.”
The plans will present several opportunities for advisers, including to help their clients determine whether going the PEP route makes sense and, if yes, to help them evaluate and choose the PEP that is most suitable.
“Some advisers will develop a relationship with one or two PEPs, and that will be the way they consult,” says Neil Lloyd, a partner with Mercer and head of its U.S. defined contribution and financial wellness research in Vancouver, British Columbia. “Some advisers may become an expert on all PEPs, and their role would be to choose which one is best for a client, and maybe they develop a business that’s more focused on monitoring PEPs.”
Besides guiding new clients, advisers should re-examine existing clients, as well, to see which might benefit from switching to a PEP.
“PEPs may present an opportunity for some advisers to go back and introduce a new service model or a better outcome to plans they already have,” says Scott Matheson, managing director of client solutions at CAPTRUST, in Raleigh-Durham, North Carolina.
Some advisers may choose to create a PEP to sell to clients and serve as the pooled plan provider. Other advisers may opt not to build and sell plans themselves, but to focus on 3(38) fiduciary work, selecting PEPs’ investment menu, or to serve as a third-party administrator (TPA). Large advisory firms may choose to take on some or all of these roles in-house.
“No matter where firms sit, whether they’re a financial adviser, a recordkeeper or a mutual fund manager, they’re going to be working together to put the program in place,” Rausser says. “The biggest question is: Who will be the PPP?”
Once PEPs are up and running, there should continue to be opportunities to bring on new clients, including new small businesses.
Challenges for Advisers
While PEPs hold out many opportunities for advisers, they also present challenges. Chief among these could be a surge in competition for clients. If 100 employers can work with just one adviser rather than 100 separate advisers, that could leave 99 advisers without that potential business, Campbell says.
Plus, he says, advisers are not the only ones who can serve as a PPP. Many recordkeepers are well-equipped for, and interested in, doing so, along with broker/dealers (B/Ds), banks and insurance companies, etc. Some of these large institutions may opt to market their plans directly to employers, cutting out the adviser entirely.
According to Rausser, no matter who sits on top as the PPP, one of the biggest challenges to launching PEPs will be establishing the scale necessary to make them viable. The PPP could have trouble accessing lower prices, due to the fact it is essentially starting from scratch.
“There are costs associated with getting a PEP ready: the document selection, getting a platform, getting it cost competitive without having any dollars in there,” Matheson says. He conjectures that the first to buy in will “be established smaller plans that are interested in the fiduciary risk transfer or the cost savings.” From there, advisers “can pick up the incremental new business, with clients where it’s their first money in and [the participants’] first deferrals.”
The first generation of PEPs is apt to be fairly bare-bones, giving employers few options for customizing their plan for their workers, Campbell says.
“At least at the beginning, PEPs won’t be terribly flexible,” he says. “To get the concept off the ground and running efficiently, the initial PEPs may have some limited features. But as the PEP market develops, we may start to see more customization.”
The more complex a plan gets, the more regulatory guidance it may need, Campbell adds. This is a further reason the earliest plans will likely be less sophisticated.
Still another challenge advisers will face is the potential revenue impact. There is much potential for new business, but the whole purpose of PEPs is to create a less expensive structure. That means existing clients that move into a PEP will probably expect to receive discounted prices.
“PEPs are a less expensive structure, so someone is going to get paid less, whether it’s because they get disintermediated or because the simple weight of purchasing power leads to accelerated fee compression,” Swisher observes.
Why Choose an Open MEP? |
|
Myth |
Reality |
Open MEPs are a low-cost retirement plan alternative. |
Open MEPs are likely to come in many “models,” as plan providers create their own version of a multiple employer plan. Pricing will depend on the size of the plan, its design and the level of services provided |
Employers are able to totally offload plan administration. |
While open MEPs are certain to take a large chunk of the administrative burden off the shoulders of small-business owners, not every task can be outsourced. At a minimum, employers will likely be required to submit timely payrolls, receive and update participant deferral and loan changes, and monitor outstanding loans. |
Open MEPs relieve employers of their fiduciary responsibilities. |
Open MEPs are designed to relieve small-business owners of many of the fiduciary responsibilities of implementing and managing a plan, but not all. For example, timely submission of payrolls, and tracking deferral and loan changes are a fiduciary responsibility, and one that employers will likely continue to handle under a MEP. It’s important for them to review any services agreement with the 3(16) fiduciary to understand what is and what is not covered under the agreement. |
| Source: MassMutual, “Open Multiple Employer Plans” | |
What’s Next?
As PEPs will not come to market until the beginning of next year, advisers have several months to prepare. Key to those preparations will be for the adviser to have first decided what his best role will be, whether to serve as a PPP, act as a 3(38) fiduciary, provide another service, or do some combination.
Advisers not creating a PEP on their own will need to connect with service providers that are—to learn more about their PEPs and also to potentially align themselves to work with one of these providers in the future.
“This year is about [the various players] understanding the potential that PEPs have—both good and bad—and figuring out whether there’s a role for them and their practice and how it will affect their business,” Campbell says. “It’s not just about whether PEPs are good or bad for your client, but it’s also about what it means for your practice and whether you need to make changes.”
Before next January, the Treasury and DOL may also provide further guidance, including additional information on potential ERISA [Employee Retirement Income Security Act] issues, necessary exemptions, and services a PPP may outsource. Still, Campbell says, there may be less such guidance this year than some advisers would like.
“The election is going to affect the regulatory agenda and timing,” he says. “If Trump is re-elected, that will have one effect. If not, there’s a bigger delay while the new administration figures out what it wants to do and what policies it wants to keep or change, and where it is in that process.”
Those who are planning to create PEPs must start considering their plan design and working on plan documents, as well as identifying potential clients and a sales and marketing plan to reach them.
“What’s the magic that’s going to make new clients or plans in general join these things?” Rausser says. “They’re going to be like any other retirement plan structure, in that they’re going to need to be sold. Don’t think that, just because you built it, potential clients will knock on the door and ask to be in one.”
PEP Rally
Advisers expect enthusiasm from clients as pooled employer plans become available for wholly unrelated businesses.
Pooled Employer Plans (PEPs), a type of open multiple employer plan (MEP), are authorized to begin next January 1. PEPs will help close the retirement plan coverage gap, by letting small businesses that have nothing in common jointly provide a 401(k) plan for their workers. MEPs allow only -similar businesses to pool resources for this purpose. By permitting the PEP to file a single Form 5500 and conduct one annual audit, the arrangement relieves much of the regulatory burden that has kept many small businesses from offering retirement benefits. Most small businesses have not been offering a plan.
Some experts say PEPs are the most significant event to restructure the small-plan marketplace since the Pension Protection Act of 2006. Plan sponsor interest in open MEPs has been growing, which means many sponsors will likely consider PEPs.
Small-Business 401(k) Access Gap
The smaller the staff a business has, the less likely that the business will have a retirement plan for its employees.
Small-Businesses Offering a Retirement Plan
Source: SCORE Association
71% |
of businesses without a retirement plan reported that plan setup is too expensive. |
63% |
of workers 65 and older still contribute to their plan. |
Source: SCORE Association |
|
Multiple-Employer Plan Growth
Number of MEP participant accounts
Growth rate
3.0MM
1.9%
2.99mm
1.9%
2.94mm
2.9MM
2.5%
2.88mm
2.81mm
2.8MM
2015
2016
2017
2018
Number of MEP participant accounts
Growth rate
1.9%
3.0MM
2.99MM
1.9%
2.94MM
2.9MM
2.5%
2.88MM
2.81MM
2.8MM
2015
2016
2017
2018
Number of MEP participant accounts
Growth rate
1.9%
3.0MM
2.99MM
1.9%
2.94MM
2.9MM
2.5%
2.88MM
2.81MM
2.8MM
2015
2016
2017
2018
Number of MEP participant accounts
Growth rate
1.9%
2.99MM
1.9%
2.94MM
2.5%
2.88MM
2.81MM
2015
2016
2017
2018
Source: Cerulli Associations
If that trend continues, now that more employers will have access to a plan, PEPs could make a huge difference for employees.
Projected Increase in Retirement Savings with a PEP
In a simulation that projected savings for 35- through 39-year-old workers who would otherwise be ineligible for an employer-sponsored plan, use of open MEPs—including PEPs—resulted in significantly greater savings for retirement.
