Employees at non-profits need access to pooled employer plans

Non-profit employees often sacrifice financially, earning less during their careers than their for-profit corporate counterparts, while bringing the same talent and dedication to their jobs.

They dedicate their lives to curing cancer, caring for the sick, fighting poverty and educating us, among countless other missions to make communities better.

Today, many non-profit employees rely on 403(b) plans for their retirement savings. ERISA 403(b) plans cover more than 9.9 million people with over $600 billion in assets. Unfortunately, under the current legal framework, 403(b) plans are not permitted to take advantage of PEPs. These workers deserve the right to a secure and dignified retirement. That's why we urge Congress to work together on a bipartisan basis to enact legislation this year that will lower costs and update regulations to enable 403(b) plans to take advantage of pooled employer plans, or PEPs, a new retirement savings model that is proving more effective than traditional 401(k) plans for private-sector employees. The House of Representatives has already passed such legislation — Securing a Strong Retirement Act of 2022 — with nearly unanimous support.

Notably, the Senate appears ready to do the same, with Senate Finance Committee Chairman Ron Wyden, D-Ore., and ranking member Mike Crapo, R-Idaho, at the beginning of September formally introducing their bipartisan bill — Enhancing American Retirement Now Act, or EARN Act, — to bolster retirement savings. Despite some differences between the House and Senate legislation that will need to be resolved before a final bill can become law, there are far more similarities than differences between the two approaches — including the provision to enable 403(b) plans to take advantage of PEPs — and there remains a desire by lawmakers in both parties to enact retirement savings legislation during the lame duck session of Congress.

Today, for-profit workers are benefiting from higher performing, more efficient 401(k) plans through PEPs. Within the Aon PEP, for instance, "all-in" participant fees can be less than half of those paid in traditional 401(k)s — totaling roughly 20 to 30 basis points for the Aon PEP — according to data from Brightscope and current Aon PEP costs.

We believe the savings opportunity through PEPs could be even more significant for 403(b) plans.

Though it may not seem like a lot, the lower fees allow employees to accumulate an additional 11% or more retirement savings during their career compared to typical 401(k) benefit programs. This can produce up to two additional years of retirement spending. This analysis is based on a hypothetical 25-year-old employee with a $50,000 starting salary, $3,000 starting account balance, 4% annual pay increases, retirement age of 67, 3% initial savings rate with auto escalation to 10%, who is invested in a diversified target-date fund and has employer matching of 100% on the first 3% and 50% on the next 2% of savings as a percentage of pay. The income improvement in the Aon PEP also assumes a 25-basis-point-reduction in participant fees.

The benefits of transitioning to a PEP — half the costs, reduced time commitment from corporate staff, improved governance and high-quality retirement planning options — have become material for employers and their employees in the for-profit world. We expect more than half of U.S. employers that sponsor 401(k)s will merge into PEPs by 2030.

Allowing non-profit employees to access PEPs through their 403(b) plans would help lower plan costs, including record-keeping and investment management fees. Beneficiaries also would have access to investment tools and education services to better prepare for retirement.

From the non-profit employer perspective, PEPs will reduce staff time and the need for outside consultants dedicated to plan administration, compliance and governance (i.e., elimination of many tasks such as government filings, plan audits, etc.). PEPs also reduce fiduciary and litigation risks.

Those in our industry have read the headlines. Retirement plan litigation has risen significantly in the past few years, with higher education and health-care institutions targeted as well as those in the for-profit sector. In addition, the pace of consolidation in the health-care industry has created a complex situation for some of the largest health-care systems in the country. Each hospital that is acquired is likely to bring along a legacy 403(b) plan to manage. Since each plan has its own menu of investment options, often with multiple administrators serving each individual plan, even plan mergers do not eliminate the complexity.

These organizations need a better way to manage their 403(b) plans, protect participants' retirement income, and carry out their fiduciary duties. A PEP would allow non-profit plan sponsors to delegate fiduciary duties to pooled plan providers that are experts in retirement plan management and better positioned to implement best practices.

PEPs offer a tremendous opportunity to enhance retirement security for American workers, particularly for segments of our population that are currently underserved. For non-profit workers to benefit, Congress must enact legislation that allows 403(b) plans to take advantage of this innovation to bolster retirement savings.

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.

(PEPs') lower fees allow employees to accumulate an additional 11% or more during their career compared to typical 401(k) benefit programs. This can produce up to two additional years of retirement spending.