Commentary: Why you need to know and understand pooled employer plans

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:

• Recordkeeping.
• 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.

Depending on the size of the plan sponsor, joining a PEP may allow them access to record-keeping platforms that they didn't have access to on their own. Record-keeping services are constantly evolving with new tools and features to help participants become retirement ready and to incorporate concepts of behavioral finance to help participants make good, overall financial decisions. If this better access can be coupled with lower fees due to pooling the assets of all of the participating employers, it's easy to see why plan sponsors should be evaluating their current setup versus a PEP.

PEPs will also vary in terms of how much fiduciary responsibility they will assume. It is imperative for a plan sponsor to understand what will and/or will not be assumed if they join a PEP. Typically, fiduciary coverage will be offered under both ERISA 3(16) (plan administration) as well as ERSIA 3(38) (investment oversight and management). Each PEP provider approaches these two fiduciary areas differently which is why plan sponsors need to pay careful attention when comparing the various PEPs. As it relates to plan administration, the plan administrator is responsible for ensuring the plan is administered in accordance with its terms as well as the provisions of ERISA. This includes being responsible for required compliance notices, non-discrimination testing, benefit limits and all other functions necessary to keep the plan qualified. The default plan administrator is the plan sponsor, unless the PEP is taking the full ERISA 3(16) fiduciary responsibility.

Investment fund options will also vary. Many PEP sponsors will have a typical fund lineup headlined by a target-date series, a choice of passively managed investment options and a choice of actively managed options. Some will also include a brokerage window and/or a managed account option. Some of the options will be in mutual funds and others will be in collective investment trusts. Going further, some PEP providers offer "white-label" funds where each fund includes a couple of managers whose investment styles are blended together. For example, you may see a fund combine a large-cap growth manager with a large-cap value manager to create a large-cap blend fund exclusive to the PEP. Regardless of the funds offered, it is another important piece of analysis to understand the track record of the PEP provider in selecting the fund lineup, making changes to the lineup when necessary and assessing the performance of the PEP investment selections.

As more plan sponsors enter into PEPs, the PEP industry will further develop and make the benefits even more attractive to plan sponsors. It's critical that plan sponsors fully educate themselves on the various PEPs and make sure they are doing proper due diligence to ensure that they have the optimal setup for their plan participants. Given the potential conflict of interest with their current service providers (i.e., joining a PEP could result in their termination of services), plan sponsors may find it beneficial to engage an independent consultant to help them through their PEP assessment.

Tom Cassara is the CEO of Agilis, a new spinoff of River and Mercantile, effective July 18. Previously, he was managing director and head of the U.S. business of River and Mercantile, based in New York; Michael Clark is a managing director based in Denver. This content represents the views of the authors. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.