Millions of Americans are scrambling for retirement help, yet the retirement plan market leaves yawning gaps in the populations it serves. For example, in 2017 Pew reported that 35% of private-sector workers age 22 and older had no access to any sort of retirement plan. Depending on which reports you read dealing with retirement preparedness, it appears that people without 401(k) access number in the tens of millions.

Then came the Setting Every Community Up for Retirement Enhancement Act of 2019, otherwise known as the SECURE Act. One of the goodies inside it was the creation of a new kind of multiple-employer plan known as pooled-employer plans, or PEPs. This new structure becomes a fact of life on January 1, 2021. And it rips open whole new possibilities for small companies looking to offer retirement access to their employees.

Unlike regular multiple-employer plans, which must serve similar industries, geographies or groups under a common nerve network, pooled-employer plans knock down the old legal walls so that conceivably any small company can join an outside plan. Ideally, this means a garment company in Connecticut can join the same PEP as a resort owner in California.

One of the knocks on small companies is that they are too small to launch their own 401(k)s, which they consider too expensive and less important than health-care benefits. In an ideal world, the new PEP structure would allow a company to come along and act as a big aggregator that rolls up all those little companies into a big outsourced plan and then acts as a giant HR department for them.

Firms such as Aon, Mercer (the Marsh & McLennan company) and Lockton are already getting their new PEPs ready for 2021. CAPTRUST in Raleigh, N.C., is considering its own PEP.

The U.S. Department of Labor writes, “By allowing most of the administrative and fiduciary responsibilities of sponsoring a retirement plan to be transferred to a ‘pooled plan provider,’ the pooled employer plan can offer employers, especially small employers, a way of offering their employees a workplace retirement savings option with reduced burdens and costs compared to sponsoring their own separate retirement plan.”

Among the chores that PEPs can take off an employer’s plate are Form 5500 filings, plan audits, hardship distributions and (the big one) investment selection, said insurance broker Lockton on its website.

Another company that has anticipated the PEP wave and is launching a new service is Mercer, whose existing retirement outsource plan solution called Mercer Wise 401(k) is using Empower Retirement as record-keeper. Mercer Wise 401(k) had already reached a billion in assets as of August, the company said.

Preston Traverse, a partner at Mercer in the DC plan solutions segment, says the firm has been working for the past nine months on a PEP project. He helped lead that team, as well as the team that launched Mercer Wise 401(k), which acts as fiduciary for plans in both 3(16) and 3(38) capacities. He noted that Mercer has 34 plans and several other plans in the works that operate very similarly to a PEP. 

"The advantages of a PEP, obviously, is that a whole bunch of plans can pool their assets and bring scale to the program," he said. "We leverage the same type scale with our group of plans. So to us, we just look at the PEP as another iteration of what we’re doing. We think it’s actually really good for us.” 

And he believes more companies entering the market with such plans will drive down costs for participants.

“You’re going to see a variety of consultants like us launching these vehicles,” Traverse said. “In these times of Covid and stress in the marketplace, it allows someone like Mercer to become an extension of the HR department.”

The new structure has created something of a land run among these retirement plan provider companies. But it’s also brought up a slew of questions about fiduciary responsibility—the things plan sponsors often want to outsource to various degrees to protect themselves from regulatory burdens, legal liability and the fallout from disappointing products.

New PEP providers must register with the Department of Labor and the Treasury Department. But it’s unclear as of yet which fiduciary responsibilities they will take on, and that's a big deal for plan sponsors. If employees decide to sue somebody for the poor performance of their retirement funds, it’s important to know who’s going to be holding the fiduciary bag. Who selected the funds? Were any funds affiliated with the PEP operator? How much are they charging? Was there a conflict of interest in the funds’ selection?

“What it’s looking like is that there’s going to be a number of players … to help provide fiduciary responsibilities to that PEP," said Shawn O’Brien, a senior analyst for retirement at Cerulli Associates. "So you can have an investment consultant, say an Aon or CAPTRUST, serving as a 3(38) fiduciary to the PEP. You could have, say, a record-keeper or a CPA serving as the 3(16) fiduciary for the PEP, and also the pooled plan provider for the PEP. Or you can have a CPA serving as the pooled plan provider and then a record-keeper providing record-keeping services.”

Fiduciaries acting under Section 3(16) of the Employee Retirement Income Security Act of 1974 (ERISA) generally handle admin duties such as loan and distribution approval and they can make recommendations only. Under ERISA 3(38), meanwhile, plan sponsors largely offload the fiduciary burden onto the 3(38) advisor, who has discretion over choosing funds and managing the investments. In the 3(16) case, the advisor helps you, and in the 3(38) case the advisor largely does it for you, says the conventional wisdom (though lawyers caution that plan sponsors never totally shed their fiduciary obligation, since they are still choosing the providers and can get dinged for choosing bad ones).

“It would be really difficult to determine how big this market could or will be,” O’Brien said.

Who Will Be The Top Players?
The Department of Labor said that although the SECURE Act doesn’t limit who can act as pooled plan providers, “it is expected that financial services companies (such as insurance companies, banks, trust companies, consulting firms, record-keepers, and third-party administrators) will be the primary sponsors of pooled employer plans.”

The DOL estimates that roughly 3,200 entities will register to serve as PEP providers, and the pioneers will be the 2,378 record-keepers and plan administrators already serving existing DC plans, which are expected to make up 50% of the market. They’ll be followed by professional employer organizations, as well as direct annuity writers, chambers of commerce and registered investment advisory firms. In the 30,000-plus universe of RIAs the DOL counted, the estimated number of participants is only around 1,500, and their market share anticipated to be only 5%.

“While retirement plan advisors such as broker-dealers and registered investment advisers are also plausible candidates,” the DOL said, “the department believes that many would be reluctant to assume the named fiduciary and plan administrator roles.” In other words, they may want to serve indirectly, acting as 3(38) investment managers to the PEPs, but not take on fiduciary roles for the plan sponsors directly.

Jennifer Doss, the director and defined contribution practice leader at advisory firm CAPTRUST, said her company is interested in this market but doesn’t have a PEP vehicle ready to go as of yet. First, it wants the DOL to clarify certain things about a PEP’s roles and responsibilities and what actions are allowed.

Among the questions people are asking: What transactions are prohibited? What constitutes conflict of interest?

“There are some pooled employers that are going to be launching a PEP on January 1,” Doss said. “Yet we don’t have complete clarity on a couple of items related to PEPs at this point.

“I would say we do want to be involved in the PEP space," she added. "However, I would say we’re still contemplating what that role is. I don’t think we’re necessarily tied to having our own PEP."

Instead, she noted, CAPTRUST might work for the plan by selecting the funds and monitoring the investments but not taking on the PEP responsibility directly. "That’s something we do for a lot of plans today. So we could very easily slot in and start doing that for a PEP.”

Are PEPs A Revolution?
Will pooled-employer plans cause a business revolution? Will a few huge aggregators roll across the land picking off all these small retirement plans and clean up? Not everyone is convinced.

Aon, which has enlisted Voya Financial as record-keeper, claims the PEP structure will change the retirement landscape as much as 401(k)s did once upon a time.

Another firm getting into the space, however, says there are caveats. Kansas City, Mo.-based insurance brokerage company Lockton, which launched a new outsourcing initiative that would make PEPs its first order of business (tapping Transamerica as record-keeper) concedes that PEPs won’t be for everybody.

“Single-employer plans generally allow for an almost limitless decision tree of design and investment options, but to achieve efficient pricing, many PEPs will likely place limits,” said Lockton in a report on its website.

“Employers who transition into a PEP will also need to pay careful attention to protected benefits to determine if a PEP can accommodate their existing employees’ rights,” Lockton added. “In addition, employers who enjoy a great deal of investment menu flexibility and the ability to make their own investment decisions may also find that a PEP cannot meet their needs.”

There are also arguments that multiple-employer plans aren’t actually having the desired effect of driving down costs in the first place, and that could pour cold water on the idea that PEP plans can change the game.

Doss at CAPTRUST says there are two very different camps forming when it comes to anticipating the success of this new market: Some think it means consolidation of the current plan provider market, especially the mid-market, while others think it’s about cracking open a market of new, tiny plans.

“If you’re talking about start-up plans, and plans that don’t currently exist, we know that there are just a ton of small businesses out there and it’s the kind of people that are not covered by a retirement plan today,” Doss said. “That was a primary focus of the reason Congress created this PEP. That was their ultimate goal … to increase coverage across the United States. But that is so much of a question mark. Because how many small businesses can you go door-to-door and get to join something like this? It’s a very grassroots effort.

“You could get a lot of uptake, or you could get a lot of small businesses that are not interested in having a retirement plan period, no matter how cheap it is," she added.