Businesses spun off from Fortune 500 companies are taking a shine to pooled employer plans, choosing them over stand-alone 401(k) retirement plans for their employees.
The reasons are twofold, according to Rick Jones, a senior partner at Aon and head of the company’s pooled employer plan.
Spinoff companies are starting from scratch and often don’t have the human resources staff to manage a traditional 401(k) plan. Plus, Jones said, they lack the scale they once had with the large parent company to negotiate the fees on their workplace plans.
By joining a pooled employer plan, spinoff companies tackle both challenges at once, Jones said. They gain the scale they need via the PEP to negotiate plan fees, while also offloading the administrative responsibilities and fiduciary risks that come with managing a stand-alone retirement plan.
“We’ve had a lot of traction with these spinoff organizations,” Jones said, adding that they face a level of complexity that “they would rather not have to tackle by themselves.”
Of the nearly 100 employers participating in the Aon PEP, some 10 to 15 are Fortune 500 spinoffs, Jones said. Jones declined to disclose the companies that joined the Aon PEP or how much in assets they had in the plan. In total, the Aon PEP has gathered more than $3 billion in assets and commitments since its launch in 2021.
The demand for pooled employer plans among spinoff companies comes as the number of companies spinning off businesses has taken off. In 2023, there were 211 spinoff deals, following 232 in 2022 and a record 234 in 2021, according to Spin-Off Research, an advisory report featuring analysis of spinoff transactions.
Unexpected demand
For Aon and other PEP providers, the demand from spinoffs was somewhat unexpected.
“It developed based on an increase in corporate restructurings,” said Preston Traverse, DC midmarket solutions leader at Mercer, adding that he hopes the trend will continue going forward.
“Companies are streamlining to increase profitability in the current market,” Traverse said.
Of the 21 employers that are in the Mercer Wise PEP, nine came from corporate actions such as spinouts and mergers, according to Traverse.
“We’ve done tons of meetings with larger plans doing spinouts, which is really big right now because people are spinning out different divisions to control their costs,” he said.
The Mercer Wise PEP, which launched in 2022, has $315 million in assets with an additional $150 million expected in the first quarter, according to Traverse.
While Aon and Mercer report that employers of all sizes and across all industries have expressed interest in PEPs once they’re told about them, spinoff business is different in that the companies actively seek out the new pooled plans. Spinoff companies don’t need any marketing or education about the pooled plans because they’re already sold on the idea, Traverse said.
“I feel they come to us and our competitors,” Traverse said, adding that large spinout companies like getting “competitors in a room” to see which one offers the best deal and “has the best underlying platform, record keeper and investments.”
Pooled employer plans such as Aon’s and Mercer’s are a relatively new type of plan that began coming to market in 2021, thanks to the SECURE Act, which greenlighted their creation. The new pooled plans were designed to entice more employers to offer 401(k) plans by allowing them to pool their plans with those of other employers, even if in unrelated businesses. This way they could potentially lower their costs through economies of scale, while also reducing their administrative workload and fiduciary responsibility.
Spinoff companies have the feel of small, startup companies that don’t offer workplace plans — the ones that pooled employer plans were created to help. While some spinoff companies transfer the existing 401(k) balances of workers moving to the new entity from the former parent company to the PEP, others take a different approach. Some leave the 401(k) balances at the parent organization, giving workers the option to roll over their money into the PEP or other qualified retirement savings plan, or even an individual retirement account.
“The PEP for that participating employer is starting out with zero assets and growing from there,” Jones said, referring to spinoff businesses that opt to leave existing 401(k) balances at the parent company.
Workers moving to a spinout company offering a pooled employer plan don’t feel like they’re being downgraded to a less attractive plan, according to Jones. In fact, it’s just the opposite, Jones said.
If a company is spinning off from a Fortune 500 company such as, say, Hewlett Packard, it is losing purchasing power that Hewlett Packard had in the 401(k) program that the spinoff organization might not have based on size, Jones explained.
“You may be losing purchasing power, but you’re regaining it with the PEP transition,” he said.
Jones estimates that employers that join Aon’s PEP see total plan cost savings of more than 40% vs. having their own stand-alone plans.
In addition, the spinoff company can customize the match, vesting schedule and other plan features in the PEP so that it mirrors the 401(k) they had prior to the spinoff, he said.
“It’s not a step down,” he said. “The Aon PEP investment lineup we believe is high performing at a reasonable and low cost, and we monitor it like hawks to make sure it continues to deliver value. Participants are gaining, if not maintaining, a great platform to manage their money on. They’re gaining, if not maintaining, a great investment lineup, and they’re gaining, if not maintaining, the purchasing power they had in the larger plan.”
Jones and Traverse were reluctant to say how much spinoffs will power business going forward and whether they would be a primary growth driver for their PEPs.
“I hope a lot,” said Traverse. “However, it’s very dependent on this type of corporate activity taking place.”
