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 became 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 with any other small company. 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 often too small to launch their own 401(k) plans, 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 one big outsourced plan and then acts as a giant HR department for them.
Firms such as Aon, Mercer (the Marsh & McLennan company) and Lockton have already prepared new PEPs 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.
Preston Traverse, a partner at Mercer in the DC plan solutions segment, helped lead that team that was working on a PEP project. Mercer already had an outsourced solution called Mercer Wise 401(k) that reached a billion dollars in August.
“The advantages of a PEP, obviously, is that a whole bunch of plans can pool their assets and bring scale to the program,” he says. “We leverage the same type of 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 says. “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—which 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,” says 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 administrative duties such as loan and distribution approval and they can only make recommendations. 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 targeted for choosing bad ones).