Retirement Advisers Increasingly Want PEP Option in Toolbox

Pooled employer plans are still a nascent offering in the retirement market, but an increasing number of advisers want them available as an option and discussion point—even if they’re not recommending them.

Pooled employer plans, which are nearing the three-year anniversary of availability, may not be actively used by many retirement advisers, but they have reached the status of being necessary for “the toolbox,” according to some industry experts.

PEPs, made possible when the Setting Every Community Up for Retirement Act passed in late 2019, have had relatively minimal uptake despite a goal of drawing more small businesses to offer retirement benefits. But PEPs are back in the spotlight as the so-called SECURE 2.0 retirement legislation pending in Congress may make them available for non-profit 403(b) plans, a sector that has previously been familiar with shared-employer benefits through multiple employer plans.

As of late 2022, there are about 100 pooled plan providers listed with the U.S. Department of Labor and about 300 PEPs registered by these plan providers, according to research done by Robb Smith, president of RS Fiduciary Solutions and one of the founders of PEP-Hub, which provides PEP training and certification for RIA firms and plan advisers. At the beginning of November, 2021, there were 80 registered pooled plan providers and 170 registered PEPs, according to the DOL’s EFAST site.

It has been difficult, Smith says, to get exact numbers for the size of this relatively new market from pooled-plan providers.

“We know that the PEP market is alive and well,” Smith says. “We know it has been successful for both start-up plans and, somewhat more surprisingly, many midsize and large plans who are sick and tired of trying to keep up with fiduciary and administrative obligations.”

PEPs had originally been intended to get more small businesses to offer retirement benefits through a shared, less-laborious and ultimately risk-mitigating platform. But as the years have passed, the tool has drawn interest from midsize and large businesses who may be converting over from a MEP or getting out of their single employer plan offering, experts say. This October, provider AON reported its PEP had drawn more than $1 billion in assets and commitments from a diverse array of businesses.

Despite recent movement in PEPs, it has been a relatively slow sales process, says Ary Rosenbaum, an ERISA and retirement plan attorney with New York-based Rosenbaum Law Firm. Rosenbaum, who is bullish on PEPs in the long run, says the most common action he has seen is the conversion of MEPs to PEPs, which have management benefits and lower costs.

A major factor that has hurt PEP uptake, Rosenbaum says, is the pandemic’s impact not just on businesses, but on DOL guidance.

“The law changed in 2019 and then came online on January 1, 2021,” he says. “There was little guidance by the DOL, and it was hard for them to come out with regulations during the rest of that year.”

But does Mikey Like It?

Smith of Space Coast, Florida-based PEP-Hub says much of the hesitancy for retirement advisers to start pushing PEPs has been first-mover status. He equates it to the “Mikey Likes It” Life cereal commercials made popular in the 1970s and 1980s.

“People are watching to see if someone else gets involved in the market,” Smith says. “They want to know if Mikey likes it before offering it themselves.”

He says that with successes such as AON’s being promoted to the market, he is seeing more advisers and advisory firms who want the option to discuss and at least offer a PEP so they are not behind the market.

“Advisers see it as an arrow in their quiver,” Smith says. “Whether they do their own PEP or go through a PPP, they see that they need it so as not to lose business.”

This extends to wealth management firms, Smith says, who can partner with a PEP to have a “turnkey” retirement plan offering as the retirement and asset management industries grow closer.

Have It, May Not Use It

Joe DeBello, a managing consultant with retirement and benefits provider OneDigital, says his experience with PEPs in the marketplace, especially among the small businesses it targets, has been limited. He attributes this lack of uptake in part due to small businesses being concerned first with cost, then to a lesser extent—if at all—with fiduciary considerations. Since there are many options cheaper than PEPs in the marketplace, motivation to pursue them is limited.

“When you look at the type of plan sponsor that finds this structure appealing, which is usually smaller businesses, they’re not being kept up at night for the fiduciary concerns,” DeBello says. “For your 50-employee plumbing business, the key concern is cost.”

DeBello, who has access to offer a PEP via Atlanta-based OneDigital, says he likes to have the PEP available to offer and discuss, but has rarely recommended it to clients because it’s often not the right fit for their specific needs.

“It is absolutely something that we want to be able to have the conversation on and be able to keep them up to speed on what’s available,” he says. “But ultimately, it’s the plan sponsor’s decision, and as an adviser in the space, you find yourself having to play a little defense. … You don’t know the type of conversations that some people are having out there with advisers who don’t really understand the pros and cons of a PEP structure. You want to provide transparency.”

DeBello says, for now, the market is immature, and that quality PEPs will rise to the surface over time. He is particularly interested to see if the three bills that make up SECURE 2.0 will pass, thereby expanding PEPs to the 403(b) market.

John Scott, the director of The Pew Charitable Trusts’ retirement savings project, says small businesses continue to face multiple obstacles to adding workplace benefit plans, ranging from cost to administer to simply being able to focus on it amid other hats they wear running their business. PEPs have promise, Scott says, but their success will depend on their structure and cost savings.

I think there are some questions about whether it is actually cheaper,” Scott says. “You still have to do a lot of the same things you do with the larger plans, without the assets. PEPs in their early days will be used for somewhat larger employers and ultimately trickle down to the smaller employers. … [A larger PEP market is] possible, but it’s really up to the providers and how they design it and market it.”

For Smith of PEP-Hub, whether a business chooses a PEP does not matter, but it is important that advisory firms can intelligently show them the option.

“If you’re not talking PEPs, your client will be at a disadvantage,” Smith says. “We don’t care if the employer does a PEP or stays with a single-employer plan; we only care that they go through a good process before making a decision.”