Taking Stock of the Continued Evolution of PEPs

For employers, PEPs “present an option worth considering,” according to Holly Tardif, director of retirement at WTW, but right now: “They’re new and they’re young—and there’s a lot of ambiguity and uncertainty.” 

Since their initial rollout in 2021 as part of the Setting Every Community Up for Retirement Enhancement Act of 2019 and their expansion in 2023 as of part of the SECURE 2.0 Act of 2022, PEPs have gained traction as defined contribution retirement savings vehicles for small, midsize and large employers alike. PEPs allow unrelated employers to join a single defined contribution plan overseen by a pooled plan provider, a third-party entity that administers the plan.

The Benefits

Rick Jones, a senior partner and leader of the national practices group for Aon’s retirement practice, emphasizes economies of scale and risk management strategy as key benefits of PEPs for adopting employers.

“[An] efficient model based on economies of scale significantly decreases fiduciary risk, in addition to shifting [responsibilities] to outside organizations that are willing to serve as the pooled plan provider,” Jones says. He adds that with more than 700,000 individual 401(k) plans in the U.S., PEPs create less work for the employer by consolidating what “corporate America is arguably doing … 700,000 times over.”

Tardif agrees.

“The economies of scale in PEPs mean that businesses … especially those that are midsize or … don’t have the expertise in-house, can offer high-quality, cost-effective retirement plans they just couldn’t access on their own,” she says. Pooling resources from multiple employers reduces fees and spreads administrative costs across “a large participant base.” The structure of PEPs will control costs, not increase them, she says.

Tardif adds that PEPs aim to help businesses free up their time, reduce administrative complexities and focus more on their core operations.

She also considers the professional fiduciary oversight of PEPs to be a plus. According to her article, “Should Employers Outsource DC Plans Next, Following Years of Healthcare Plan Outsourcing,” employers are challenged to maintain specialized expertise to effectively manage their risks in offering a retirement program to employees. PEPs can eliminate this burden on employers while continuing to provide employees with competitive retirement benefits.

“Congress got this one right when they passed SECURE 1.0 and 2.0,” says Aon’s Jones. “This is adding value and will continue to add value, as we grow and the pools get even more efficient.”

The Challenges

“I think what we’re seeing right now are what we would refer to as growing pains,” says David Kirchner, a principal for Ropes & Gray’s benefits consulting group.

Kirchner says many different entities are stepping into PEP-related roles, and they are all doing it differently. He names third-party administrators, professional employer organizations, recordkeepers and consulting firms as examples of newcomers to working with PEPs.

Kirchner adds that not all PEPs offer the same advantages; some are better for small employers, and others are better with larger employers.

“Smaller employers who are just getting started and establishing a new plan can adopt a standard, straightforward plan design that is easy to report and administer,” Kirchner says.  “For larger employers who may already have an existing single-employer plan but want to move to a PEP, they will need a PEP that has more flexibility in its ability to accommodate and duplicate plan designs and features that are already a part of the existing plan.”

Big or small, PEPs may not necessarily be the right choice for every company, agree Kirchner and Kate Whitmore, the pooled plan practice leader at Ascensus.

“[PEPs] can be a great solution for the right type of employer, but they’re not one-size-fits-all,” says Whitmore. “It’s important to understand when a PEP makes sense and when a more customized plan might be a better option.”

The two experts also emphasize how important it is to educate employers, highlighting that one of the challenges to adoption is just how new PEPs are.

“Some of the challenges come from … having employers navigate and understand the spectrum of options that are available to them,” says Kirchner. Whitmore adds that while PEPs are designed to reduce complexity, they can take time to understand.

According to Kirchner, some PEPs have not yet built the infrastructure to run their plans efficiently. He says he has mostly observed startups adopting PEP plans, not existing employers shifting gear from a traditional DC plan.

“The employer who thought that they had outsourced the administration of the plans really ends up having to step in and kind of clean up …” he says. “[This is something] employers assumed they got rid of, and they’re still having to own some of [it].”

The Misconceptions

Aon’s Jones rephrases the “challenges” of PEPs to be “misconceptions.”

“The first misconception is that they’re only for small employers,” Jones says. “Both looking at costs, as well as the experience for participants and employers, they can be really valuable for midsize and large employers and are very valuable to midsize and large employers as well.”

Another misconception he cites is the supposition that employers “lose control.” According to Jones, employers can control aspects of PEPs that are important to the organization, including fine-tuning benefit levels and selecting a good investment lineup and administrative platform on which participants can save and invest.

“We believe those [misconceptions] will be overcome as more and more companies and their participants see the benefit of PEPs and how they can deliver value to virtually every stakeholder,” Jones says.

Additional Guidance

On July 1, the Department of Labor submitted a request for information to the Office of Budget and Management concerning “areas where regulatory or other guidance would facilitate establishment and operation of [PEPs].”

“Anytime there’s attention from the DOL or the IRS specific[ally] on … future PEP enhancements, modifications … [it] is only going to help us … clarify any uncertainty within these programs,” says Ascensus’ Whitmore. “Maybe it’s not even changes; maybe it’s just additional reinforcement … to the fact that [PEPs] are here to stay.”

In 2020, the DOL submitted an RFI on prohibited transactions involving PEPs, including the possible conflicts of interest that could arise as part of plan administration. According to Jonathan Reinstein, counsel for the employment, executive compensation and employee benefits practice at Ropes & Gray, very little came from the request.

“Some PEPs play multiple roles … they don’t just want to be the [pooled plan provider]—they may want to be the PPP and the recordkeeper,” added Kirchner. “But if you [have] a PPP who’s also responsible for picking an investment adviser, and they have some relationship [with] the investment adviser … you want those things conflict-free, right?”

A pooled plan provider is a fiduciary and entity responsible for the management and administration of a PEP. A PEP’s recordkeeper is responsible for holding plan assets, receiving contributions and providing participants with a website to maintain their accounts. The investment adviser or investment manager selects and manages the investment options within the PEP.

Kirchner wonders what “filters” exist to protect plan participants from potential conflicts of interest among all parties involved.

“We still need that guidance,” Reinstein says. “Can we use the existing exemptive framework [that applies to other DC plans] and apply that to PEPs?”

Kirchner would also like guidance as to what PPPs, as plan fiduciaries, will report to the employers whose plans they are monitoring. He says one of the main points of a PEP is to offload fiduciary responsibility to a third party. However, the quality of reporting—a product of that third party’s fiduciary role—has so far been mixed.

“We’ve seen some … high-quality reporting coming out of [some] PEPs,” Kirchner says. “Other [PEPs] are not doing anything, which becomes a problem for the employer.”

Whitmore adds two more areas in which additional information could be helpful: a simplification of plan audit rules, which require PEPs that have at least 100 participants to have an annual financial statement audit; and a clarification of how plan contributions can be collected, including whether there is any flexibility for relief from standard remittance rules.