As COVID-19 continues to disrupt the global economy and redefine how society operates, it is more important than ever to listen to our clients and understand their specific challenges and opportunities, so we can best help them navigate emerging risks in an increasingly volatile and complicated world.
One of the biggest risks is that many individuals across the U.S. are not on track for retirement. Our research shows that 1 in 3 Americans working at larger U.S. employers will be prepared to retire at age 67, and that gets worse for women and minorities. The average shortfall for women at age 67 is 4 times pay vs. 2.5 times pay for men. And only 30% of women are "on track" for retirement at age 67. It also gets significantly worse for employees of small employers or gig workers.
A contributing factor is that people are overspending on short-term risks like health coverage and underspending on longer-term risks like retirement.
Through the 1980s, defined benefit funds were the most popular retirement plan offered by employers. But those traditional pensions, ones that can be depended on for a comfortable retirement, are basically a thing of the past. In fact, according to the Bureau of Labor Statistics' 2018 National Compensation Survey, only 17% of private-sector workers have access to a pension.
As a result, the defined contribution industry has grown significantly over the past 30 years. In 1990, 401(k) plans held an estimated $380 billion in assets. Today, that number is about $6 trillion. The current marketplace is made up of many different players — insurers, record keepers, retirement consulting firms, investment managers, trustees and more. These entities are all vying for business involving these assets at both the individual and plan sponsor level. The result is that buying power has become diffused, solutions are varied and variable, and it is increasingly challenging to navigate the market for both plan sponsors and individual participants.
So how can we help clients build a more resilient workforce by addressing these challenges while also creating solutions for historically underserved employees?
We believe one answer is the pooled employer plan. PEPs take the multiple employer plan concept and solve the biggest issues plan sponsors face. Aon worked with business groups, congressional leaders and other interested parties to develop the concept into a workable legislative proposal, and after seven years of collaboration — a true public/private sector endeavor — the PEP was created as part of the SECURE Act in late 2019.
Based on the overall value proposition, we predict that more than half of employer plan sponsors will transition to PEPs by 2030.
PEPs will enable so-called pooled plan providers, including Aon, to leverage size and resources to potentially enable better retirement outcomes. PEPs help avoid the issues of one bad plan merging in and corrupting the rest or requiring a nexus or similarity among all participating sponsors.
These plans can help reduce employer risk, reduce the fees paid by employees in their plans, increase governance for those employees and provide access to investment funds, education and tools usually reserved for the largest employers.
In addition, the PEP structure will enable multinational companies to expand the strategy of a master trust defined contribution plan that many are already deploying in the U.K., Australia, Europe and elsewhere. Today, companies of all sizes are being asked to sponsor single-employer plans that require them to do a number of difficult things. First, they are asked to manage complex programs with significant compliance and governance requirements. Then, they are expected to deliver diversified and cost-effective investment options while monitoring all fund managers. And finally, they are asked to provide customer service at a reasonable cost that includes the tools necessary to help employees make good choices about retirement.
As a result, this has created an environment where smaller employers cannot get access to these benefits for their employees, which can also accelerate the incidence of class-action lawsuits. Recent analysis from Bloomberg Law shows that lawsuits related to excessive 401(k) plan fees increased fivefold in 2020 from 2019, with 65 cases filed during the first eight months of 2020, while there were only 20 cases filed in all of 2019.
The PEP approach helps solve these problems. The combined scale resulting from multiple employers' participation will help drive lower plan costs, including record keeping and investment management fees. There will be improved access to participant tools and services (at an affordable price), helping to reduce staff time dedicated to plan management, compliance and governance (i.e., elimination of many tasks such as government filings, plan audits, etc.). That should reduce fiduciary and litigation risks, since the pooled plan provider will retain virtually all administrative and fiduciary responsibility for operating the PEP. And in the end, you will have improved governance (i.e., overall process, speed to act, breadth of discussion), being developed and executed by professional staff.
Based on the overall value proposition, we predict that more than half of employer plan sponsors will transition to PEPs by 2030. The benefits of such a move — lower costs, reduced time commitment from corporate staff, improved governance processes and high-quality retirement planning options will be difficult to argue with over time.
We continue to discuss with industry groups and legislators in Washington the possibility of better enabling lifetime income options inside PEPs at reasonable pricing and hope the PEP concept can be expanded to gig workers in the future. There are many markets that have insufficient or no solutions at all, but we believe PEPs provide a great opportunity to close that gap. And that this approach to retirement savings brings great opportunity to the entire marketplace, to the benefit of clients, partners and the entire industry.
We would be remiss if we did not also mention that traditional pension plans remain a large risk to many employers around the world given underfunding and liabilities — which in many cases threatens the flexibility of their business. That is why we are passionate about creating better retirement options and continuing our efforts to help bring the necessary public and private sector entities together to continue to provide a more level playing field.
Paul Rangecroft is CEO, North America Retirement at Aon, based in Somerset, N.J. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I's editorial team.