With the passage of the Setting Every Community up for Retirement Enhancement Act in late 2019, there has been a lot written about the benefits of pooled employer plans for plan sponsors and their participants. These benefits include items such as potential cost savings, reduced work for the plan sponsor, better investment choices, better participant experience and reduced risk for employers and fiduciaries. Given these advantages, and the fact that these advantages should increase in value as PEPs grow, we believe that many, if not all, plan sponsors should evaluate the PEP marketplace. As plan sponsors assess the pros and cons of PEPs for their 401(k) benefits, we believe many sponsors will transition to a PEP program.
Due to their relative newness in the marketplace, many 401(k) plan sponsors aren't aware of the multitude of PEP programs that are in operation presently. Today, there are well over 100 PEPs registered in the United States. Some of these plans have been in existence for years as multiple employer plans, while others were established with the passage of the SECURE Act. With so many options in the marketplace, it is important to understand the differences among the various PEPs since no two PEPs are alike.
Differences between PEPs can be significant as different PEPs are designed for distinct plan sponsor characteristics. Some are designed for larger plan sponsors, some for smaller organizations, some have very rigid requirements, others are more flexible. Even with their differences, all PEPs require some level of standardization to drive efficiencies and knowing the key differences may make some PEPs a better fit for some plan sponsors vs. others.
One key difference among the various PEP providers is fees and how those fees are applied. Some PEPs have a flat fee, some add an expense load to the assets invested, others charge a participant fee, and many use a combination of all of the above. The size of fees can also vary greatly. In one recent search, we saw fees range by 300% across various PEP plans.
There are also potential obscure fees that need to be taken into consideration. These are typically fees occurring at the PEP program level, such as plan audit fees. Some PEP providers absorb these costs, others charge them back across the participating plan sponsors. In addition, many PEP providers will waive the implementation fee, but may have a termination fee if you choose to leave later.
PEP programs aim to cover three main areas of 401(k) plan management:
- Plan administration.
- Investment oversight and fund selection.
Some PEP programs look to provide all three of these elements using internal resources, while others have external partners in place to provide some or all of these tasks. There are pros and cons to both approaches, but it is important for plan sponsors to understand those differences. For example, having multiple organizations will generally help with building a "best-in-class" service delivery program but may require more coordination on both the PEP provider oversight team as well as with the plan sponsor. With all services under one roof, there should be well-coordinated communication protocol. However, the disadvantage to this approach is that if one element of service is subpar, it's unlikely that the PEP provider will find a replacement since that would be akin to firing themselves for part of the service bundle.