New PEPs targeting firms without retirement plans

As providers of pooled employer plans scramble to attract sponsors of small- and midsize 401(k)s into their new pooled plans, at least two are taking a different tack. Rather than pursuing employers already offering workers a retirement plan, they're chasing those not offering one at all.

Payroll provider Paychex Inc. has already signed up 1,000 such employers into its PEP — a milestone it hit in February, a month after its launch on Jan. 1, said Michael Majors, senior director of national retirement sales at Paychex in Seattle.

"We didn't expect for it to take off that fast," Mr. Majors said.

Fidelity Investments, too, launched a PEP in January that's restricted to employers with between five and 50 employees that don't have retirement plans. The company declined to disclose how many employers have joined its PEP, saying it was too early to share a business update.

While employers without retirement plans — and therefore no assets — are not the most attractive from a business perspective for providers of pooled employer plans, they offer a relatively easy way to enter the marketplace and establish a base from which to grow, industry experts said. It's also faster and easier to move an employer without a retirement plan into a PEP than it is to move one with an existing plan, they said.

"The PEP is a natural way to help companies get their first plan started, and it made the most sense to focus on initially as our results have shown," Mr. Majors said, explaining that "things move a lot faster in the startup space."

Industry experts view the interest in the startup market as heartening given the goal of the SECURE Act, the legislation enacted in January 2020 to expand retirement coverage to more Americans. The SECURE Act facilitated the creation of pooled employer plans, which lawmakers hoped would serve as a strong incentive to get more employers to offer retirement savings plans to their workers. As a result of the legislation, employers now no longer need to be in related businesses to join a pooled 401(k) plan, where they can benefit from greater economies of scale and potentially lower costs.

Fidelity alluded to the intent of the SECURE Act as well as the size of the startup market as the reasons behind its focus on new retirement plans.

"There are millions of small businesses that do not offer a retirement plan today," said Andy Schreiner, Fidelity's Boston-based senior vice president of defined contribution innovation.

"Fidelity sees PEPs as an opportunity to help close the retirement coverage gap, providing a simplified, back-to-basics DC plan that can make it easier and more affordable for a small business to offer a retirement benefit to their employees for the first time."

While the focus on startup plans supports the ambitions of the SECURE Act, it's driven more by what some say is sensible business thinking. For pooled plan providers, it's much easier to convince an employer to offer a retirement plan than it is to get them to dump the one they have, according to industry experts.

"The companies that already have plans in place are not going to be in a position to implement the (pooled plan provider) structure right away, whereas the startups are," said Joan M. Neri, an attorney with Faegre Drinker Biddle & Reath LLP in Florham Park, N.J.

Plan sponsors that are happy with their plans are unlikely to be a good prospect for a PEP, and those that are less than thrilled with what they have are under a fiduciary obligation to evaluate whether transitioning to a new structure is prudent and in the best interest of their employees, Ms. Neri said.

"Selling them a new plan structure is going to be time-consuming," she said, explaining that plan sponsors must consider current plan features, including protected benefits, which under ERISA law must be preserved.

Employers with affiliates that were merged, for example, might have their own separate preserved benefit structures, which PEPs may not be able to accommodate, Ms. Neri said.

"Given the likelihood that companies with current plans in place are going to take their time in transitioning to the PPP structure, it really does make sense for providers to focus first on the startup," Ms. Neri said. "If I were in the marketing department of a pooled plan provider, I would be encouraging them to go this route."

Clint Cary, head of U.S. delegated solutions at Willis Towers Watson PLC in Chicago, agreed that it makes sense for pooled plan providers to pursue employers looking to offer their first retirement plan, noting that there's no conversion cost. "If you go after organizations that don't have an existing plan, there's nothing to change. You just sign them up, and they start saving," Mr. Cary said. Unlike startup plans, converting an existing plan takes "more than zero effort," he added.

Still, the initial focus on startup plans will likely broaden over time as existing plan sponsors begin to consider pooled employer plans with more of a track record, more experience and possibly more developed offerings, industry observers say.

"From a business perspective, this is the first step, not the destination in terms of who they're targeting," Mr. Cary said, referring to pooled plan providers pursuing employers without workplace retirement plans.

Indeed, Fidelity plans to expand its target market beyond startup plans in the future, Mr. Schreiner said. And Paychex, having hit 1,000 startup plans, has already opened its PEP to employers with existing plans, an effort Mr. Majors said is showing "promising early results."

Mr. Majors attributes the strong adoption of the PEP among employers without workplace plans to the ease with which they can join, unlike stand-alone 401(k) plans, which typically involve more vendors and more documents. "We're really only asking for one signature and minimal information," he said.

Employers, which in the past found their 401(k) options too complicated, can now more easily say "yes" to a PEP, Mr. Majors said. In addition, Mr. Majors believes employers probably feel a little more pressure to offer a retirement plan since COVID-19 happened.

"There's more awareness that they need to also care about their employees' financial wellness," he said.

The initial 1,000 adopters of the Paychex PEP have anywhere from one to more than 1,000 employees and cover a "good cross-section of American businesses" ranging from startups to companies that have been in business for 20 years, Mr. Majors said. He declined to say how many participants or how much in assets are in the PEP.

Even though the high rate of adoption "right out of the gate" was unexpected, Mr. Majors demurred when asked about how soon it might hit the 2,000 mark.

"I wish I could answer that," he said.