Pooled employer plans making splash as more firms dip toes into the water

Several major retirement plan service providers are diving into the pooled employer plan market with high hopes that small and midsize employers will jump in, too.

Pooled employers plans, or PEPs, were established under the Setting Every Community Up for Retirement Enhancement Act last year and go live Jan. 1. PEPs make it easier for employers in unrelated businesses to join a collective or pooled retirement plan for their workforces, with the intention that companies will be able to reduce administrative burdens and lower retirement plan costs through economies of scale as well as attract employers that currently do not offer plans.

PEPs have the opportunity to transform the retirement landscape much like 401(k) plans transformed the pension landscape, said Paul Rangecroft, Princeton, N.J.-based North America retirement practice leader for Aon PLC.

That's a major reason why Aon in June said it will launch a PEP on Jan. 1.

"PEPs are going to take the beginning of the transformation that 401(k)s started, and especially with small- and midsize employers and gig workers, will create a sustained vehicle where people can move jobs without losing all of their retirement savings, where they can save money without giving a lot of it to investment advisers or administrators, where they can make choices in an informed way, and actually give coverage to lots of people," Mr. Rangecroft said.

Aon will serve as the pooled plan provider, the entity that administers the PEP, with Aon Investment Services USA Inc., the company's investment services group, serving as a 3(38) fiduciary adviser. Aon selected Voya Financial Inc. as the record keeper.

The Aon PEP will offer various target-date funds, three core passive funds and five active funds, Mr. Rangecroft said. "We're going to encourage people to make decisions based on their level of comfort and knowledge in a way that drives the right outcome for them rather than a typical plan these days offering 30 funds with not enough knowledge of how to pick them," he added.

Jeff Cimini, Windsor, Conn.-based senior vice president, retirement product management at Voya, said he and his colleagues are currently working with Aon on the "unglamorous" behind-the-scenes work "so that on Jan. 1 we can start accepting plans into the PEP."

Voya, which is no stranger to the pooled plan space — it serves as the record keeper for multiple employer plans offered by the American Bar Association and ADP — thinks PEPs can help close the retirement coverage gap, Mr. Cimini said. PEPs "have the potential to allow (employers) to offer a retirement benefit at an economical price with limited legal liability to do so," he added.

Following passage of the SECURE Act, Smart Pension, a large London-based online record keeper, established operations in the U.S. to take advantage of anticipated business opportunities.

"It became kind of a no-brainer" to enter the U.S. market, said Jodan Ledford, Nashville-Tenn.-based CEO of Smart in the U.S.

Smart has more than 70,000 U.K. retirement plans on its platform and runs the U.K. defined contribution multiemployer Smart Pension Master Trust.

Mr. Ledford said Smart will look to use its experience reaching smaller employers in the U.K. with its U.S. PEP, which will likely launch at the end of the first quarter.

Though Mr. Ledford couldn't disclose any specifics, like the PEP's pooled plan provider, he said early success for Smart would be bringing on hundreds of plans within the first nine months on the way to thousands of plans in the years thereafter. "We onboarded 70,000 plans in the first five years in the U.K.; we would be thrilled if we could have that kind of success in the U.S. Obviously it's a bit different market," he said, noting that U.K. employers are required to offer workers a retirement plan.

Within the next five years, Mr. Ledford is hopeful that small employers will buy in. "Done right in the small plan market, I think you're going to see it go the way of the (outsourced chief investment officer) market has gone in the larger institutional retirement space, which is I think companies will once again keep being reminded that they make cars and food products, they don't necessarily need to be in the business of administering retirement plans," he said. "If these platforms grow big enough then, they're going to afford the economies of scale to all plan sponsors that are only afforded to some of the largest megaplans out there."

Mr. Ledford said PEPs have the potential to reach gig workers and Smart's model in the U.K. "demonstrates that we can be competitive and profitable searching down to that level."

In a letter to the Labor Department in February, the American Benefits Council in Washington urged the regulator to confirm that owner-employees of unincorporated businesses without common law employees can participate in PEPs in order to expand coverage. "PEPs can be established to provide gig workers across many industries with access to the economies of scale and lower costs available to large employers," the American Benefits Council wrote.

But Aron Szapiro, Morningstar Inc.'s director of policy research based in Washington, is less sold on PEPs transforming the retirement landscape. "I don't think that they're so attractive that there are going to be a bunch of employers to go, 'I wasn't offering a plan before but now with this pooled employer plan I'm going to,'" he said.

While proponents of PEPs say that employers will be happy to shed a bulk of their fiduciary responsibilities when joining a PEP, Mr. Szapiro said fiduciary risk isn't a big hurdle for small employers.

"The plaintiffs' bar is not going around suing employers with 50 workers," he said. "There's no money in it."

In states like Illinois, California and Oregon that have adopted automatic individual retirement account programs where most employers are required to enroll their workers in the state-backed program if they do not offer a retirement plan of their own, PEPs will likely be more attractive to employers, Mr. Szapiro said.

"If industry is smart, and I think industry is pretty smart, they will market themselves and say, 'Hey, you don't want to be in that crappy government plan; here, join my PEP. You will have a much high contribution limit as a principal so you can really put some money away and the fees are low and the investment options are better and we're going to start everybody in a more aggressive target-date fund,'" he said. "They should be able to market these things and they'll have the benefit of being truthful."

PEP contributions, like 401(k) plans, are limited to $19,500 annually for most savers, while IRA contributions are limited to $6,000 a year for most savers.

A bill was introduced in the House on Oct. 26 that, among dozens of other provisions, would permit 403(b) plans to participate in PEPs, expand the tax credit for small employer retirement plan startup costs and allow that tax credit to be used by employers that join a PEP for three years regardless of when the PEP was started. Under current law, if a small business joins a multiple employer plan that has already been in existence for three years, the startup credit is not available.

While it's unlikely the bill is signed into law this Congress because there are few legislative days remaining on the congressional calendar, "it's a great signal for bipartisanship for 2021," said Kent Mason, a partner with law firm Davis & Harman LLP in Washington.

For small employers, the bill's expansion of the tax credit is a major win, Mr. Mason said. "This can change the dynamics of whether small businesses can afford to have a plan," he added.

Starting Jan. 1, the retirement industry will see if those employers are ready to jump in.