Who Will Be The Top Players?
“It would be really difficult to determine how big this market could or will be,” O’Brien says.
The Department of Labor said that although the SECURE Act doesn’t limit who can act as a pooled plan provider, “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 estimated 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. From the 30,000-plus universe of RIAs the DOL counted, the estimated number of PEP participants is expected to be only about 1,500, and their market share anticipated to be only 5%.
“While retirement plan advisors such as broker-dealers and registered investment advisors are also plausible candidates [as providers],” 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 directly for the plan sponsors and open themselves up to lawsuit exposure if things go wrong.
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?
“We don’t have complete clarity on a couple of items related to PEPs at this point,” Doss says. “I would say we do want to be involved in the PEP space. … 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 notes, CAPTRUST might work for a PEP 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. In other words—fewer options mean less exciting plans.
“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.”
Then there are the pesky arguments that multiple-employer plans aren’t even 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 mopping up 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 says. “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?”