The Risk of Ignoring PEPs

Advisers need to be prepared for the evolving pooled employer plan marketplace—or they might face the threat of losing business.

photo of Ted Schmelzle

Ted Schmelzle, second vice president at Securian Financial

The introduction of the pooled employer plan (PEP) adds both opportunity and complexity to the defined contribution (DC) plan marketplace.

The adoption of PEPs is a journey that will happen over time, as providers and advisers will introduce and define offerings for different segments of the market and as exposure and education evolve alongside product offerings, says Ted Schmelzle, second vice president at Securian Financial. While there won’t be an immediate seismic change, as only about 8% of plans turn over year over year, there’s always plenty of opportunity to build new business.

Therefore, Schmelzle says, advisers ignore this plan type at their own peril. He spoke with PLANADVISER about the evolving PEP marketplace and opportunities for advisers to incorporate these programs into their businesses—as well as the threat for those who do not.


PLANADVISER: An employer-sponsored retirement plan is a vital part of building savings for the majority of Americans, but too many lack access to these types of plans. It is clear that we need to expand coverage and, clearly, the PEP is one way to do that, but it seems advisers are split on whether this new market is an opportunity or a threat. What do you think?

photo of Ted Schmelzle

Ted Schmelzle: It is probably both. From the adviser standpoint, there is an incredible interest in trying to make products available and accessible, and at the same time make their business more scalable. And when I say “adviser,” I’m referring to fiduciary advisers. PEPs offer the potential to allow advisers to bring in new clients in a smaller market where they perhaps haven’t been in the past.

Advisers are vital to exposing plan sponsors to PEPs and helping them understand what they offer. The average plan sponsor is not going to understand what a pooled employer plan is, or if they should be interested.

PEPs sprung into existence on January 1. So we’re somewhere near the middle of the beginning. We’ve had a year to think about this and prepare for it. By happenstance, the roll-out coincided with the pandemic, when employers had so many other concerns. While we’ve had a lot of interest in PEPs, this is going to be a journey, rather than a single point-in-time event.

But I do think we’re going to see more current plan sponsors gravitate toward the outsourcing of administrative and fiduciary responsibilities in adopting a PEP. At Securian Financial, we have many pooled arrangements with clients already. We know multiple employer plans (MEPs) are very successful for the right groups and there is a strong desire, even from sophisticated plan sponsors, for this type of solution.

Once plan sponsors that are currently offering a plan are educated, you’re going to see more interest from them. They’ll learn about these either through publications such as PLANSPONSOR, or because it will be brought to them by their plan adviser or competing advisers. A prospecting adviser might approach a sponsor and say, “Why aren’t you considering adopting a PEP? I can’t believe you haven’t been engaged on this by your adviser. Do you know you can significantly mitigate your administrative and fiduciary risk and potentially lower your fees?” I think that’s a legitimate threat to advisers and their existing business.


PA: You mention education driving awareness and interest. Do you anticipate that plan sponsors of existing plans will be willing to give up their plan design or customization to move to a PEP with less customization in order to take advantage of the fiduciary mitigation?

photo of Ted Schmelzle

Schmelzle: PEPs are not going to be for everybody. It depends greatly on how the PEP is structured. If an existing plan has 15 different definitions of compensation, a complicated plan design structure, or unique and complicated eligibility provisions, a PEP will not be a good fit.

I would say that our experience in converting plans to PEPs has been that we’re able to accommodate most plan provisions. It’s important to note that there doesn’t need to be one single plan design for every participating employer in a PEP. Plan advisers can have that conversation with companies and ensure they understand this does not have to be a one-size-fits-all plan structure.



PA: What are the provisions that can be varied among participating employers, and what are some of the things that may be difficult to retain in a current plan design, if a plan sponsor considers going to a PEP?

photo of Ted Schmelzle

Schmelzle: You can have different match provisions, as well as different eligibility provisions from participating employers. Participating employers can also decide whether they offer loans or hardships. In most of the areas that are of greatest concern to participating employers, you’re going to see some degree of flexibility. I should note, that’s not going to be limited by the PEP, per se, or the legal structure of the plan, but by what the recordkeeper is willing and able to support.

Advisers are going to want to help determine where the flexibility is offered and how that compares to an offering with better pricing from another recordkeeper.

There are some complexities in the PEP space, one of which is that we have a new entity under the Employee Retirement Income Security Act (ERISA): the pooled plan provider (PPP). This entity removes some material fiduciary responsibilities from the plan sponsor. However, it will be a fiduciary decision to decide to participate in the PEP. Depending on the PEP structure, there may also be some employer responsibility in selecting and appointing a 3(38) fiduciary. One thing is clear—advisers can continue to play a key role in supporting the plan sponsor with both fiduciary and non-fiduciary services. This is going to evolve as a marketplace.


PA: Are there areas that you think advisers should emphasize or look into when evaluating PEP offerings?

photo of Ted Schmelzle

Schmelzle: One area is fees. It is unclear to me how, ultimately, the PEP structure will either inform, shed light on or expose recordkeeping fee subsidization. This adds another layer of complexity, which advisers can help employers examine. When recordkeeping fee models are dependent on subsidization, the PEP will most likely have to be structured to support that subsidization.

Many recordkeepers in the retirement plan industry haven’t hesitated to shift costs in order to maintain profitability while illustrating a lower recordkeeping fee. There’s a continuing duty to decipher and understand that. This will create disparity among providers, and we see that already.


PA: How do you think advisers that want to grow this side of their business should frame the conversation about this plan type? What candidates are good targets for PEPs?

photo of Ted Schmelzle

Schmelzle: Well, there are definitely bad candidates for this plan type, and advisers should know who not to be pitching this to. If a plan has habitually bad data, that bad data will not become good data in a PEP. Or if a plan has a complex plan design, that’s probably not a good candidate either.

When it comes to size, we’ve seen this run the gamut. Various providers cite the target market from startup plans up to the largest plans at the largest companies. We don’t know where that ultimately will lie.

Advisers who typically work with us are retirement plan specialists in this business. They’re going to know the roles of the various entities involved with the PEPs and can help plan sponsors discern the differences between the various offerings and help each participating employer understand its responsibilities.

To me, a good fit or target for the PEP would be a plan that has its data in order and otherwise is well running; is just at or above the audit threshold; and has a human resource (HR) executive who’s wearing 10 different hats relative to benefits. Those administrative services can effectively be outsourced along with the fiduciary liability, often at a lower cost.

So for advisers currently working with these plans that are good candidates, this could be a threat to business. What if you’re the existing adviser and somebody else comes in with a PEP saying, “I can take away nearly all of your fiduciary administrator responsibility. We can do it at or below the cost you’re currently incurring, your audit fees will go down significantly or perhaps disappear, and you’re going to completely outsource the 3(38) function. So you don’t have to worry about calling balls and strikes on investment options.” How do you counter that? Advisers need to be prepared.

This is a general communication for informational and educational purposes. The information is not designed, or intended, to be applicable to any person’s individual circumstances. It should not be considered investment advice, nor does it constitute a recommendation that anyone engage in (or refrain from) a particular course of action. If you are seeking investment advice or recommendations please contact you financial professional.

Securian Financial’s qualified retirement plan products are offered through a group variable annuity contract issued by Minnesota Life Insurance Company. 

Securian Financial is the marketing name for Securian Financial Group, Inc., and its subsidiaries. Minnesota Life Insurance Company is a subsidiary of Securian Financial Group, Inc.