Pensions & Investments’ Plan Sponsor’s Guide to PEPs is a resource for employers interested in providing 401(k) or 403(b) benefits using a pooled employer plan — a type of collective retirement plan that can deliver better outcomes for both employers and their employees via its design, implementation, cost and ongoing management.

Each section of the Guide takes 401(k) and 403(b) plan sponsors through the steps of how PEPs work and whether they are an appropriate approach for an employer; how to evaluate pooled plan providers; best practices for implementation and monitoring; and reviewing plan design and investment menus that can help meet the retirement needs of their participants. Alongside visual and practical guidance, Aon provides insights into its PEP model and shares its perspective as a pooled plan provider, or PPP, on how employers offering 401(k) and 403(b) benefits can successfully adopt and monitor PEPs.

I

WHAT IS A PEP?

A pooled employer plan, or PEP, is a defined contribution plan in which a group of unrelated employers participate as part of a single pooled plan. It is managed by a pooled plan provider, or PPP, which acts as the plan’s fiduciary, oversees the plan’s investments and handles administrative tasks, such as plan documentation, regulatory filings and compliance. The PPP is responsible for selecting and monitoring all third-party vendors and co-fiduciaries hired to deliver services for the PEP, such as the record keeper, investment advisor, investment managers, third-party administrator, legal counsel and plan auditor.

Ever since legislation in 2019 enabled PEPs, employers have shown significant interest in these plans, with many joining or actively evaluating them. Employers’ interest is powered by a number of factors: A PEP can save time and costs in setting up and managing benefits, and it can lower potential risks of running afoul of the labor laws that govern retirement plans. An additional impetus is the renewed focus by companies on the value of 401(k) and 403(b) plans to help attract and retain talent in today’s competitive labor market.

PEPs are improving retirement outcomes for American workers and retirees. And that helps make it easier for employers to offer this customized and comprehensive solution. At the same time, employers can better focus on their core businesses rather than DC plan management.

Rick Jones

Senior Partner, Leader of the Aon PEP and DC Solutions

Aon

The PEP value proposition is that it delivers a customized and comprehensive 401(k) or 403(b) plan with less work required of employers, less risk for fiduciary compliance and better retirement outcomes for employees.

“We think PEPs create significant value and open up the doors for virtually every employer to consider them,” said Rick Jones, senior partner, leader of the Aon PEP and DC solutions.

“Employers can see the value in a PEP and the benefits that it brings to their employees — the ability to offer broader plan features and a better service set to their participants for the same fees or less,” added Beth Halberstadt, senior partner and U.S. investments defined contribution solutions leader at Aon. “The ability for employers to experience the benefits of scale and offer lower investment expenses to their participants by investing in high-quality, cheaper funds is significant.”

The PEP structure clearly lays out the roles and responsibilities of the PPP, while the employer is responsible for monitoring the provider.

¹Aon PEP provides automated 360 payroll integration and automated ACH contribution funding. 3(38) investment services provided by Aon Investments USA Inc. As the Pooled Plan Provider, Aon is responsible for providing the following services to the plan. Aon may select affiliated or unaffiliated service providers to fulfill Aon’s Pooled Plan Provider responsibilities.  

Source: AON

Under the PEP model, each participating employer is responsible for overseeing the PPP on an ongoing basis and monitoring how their participants are utilizing the program. Each employer is also responsible for selecting the plan design and employer contribution levels, fulfilling payroll and funding employee and employer contributions accurately.

On the provider side, the PPP takes on the PEP’s fiduciary oversight and compliance, plan management and operations, and participant communications. Since the PEP standardizes such functions as the plan’s setup, onboarding, third-party vendor relationships (e.g., record keeper, audit firm) and plan administration, it can offer more efficiency and lower costs to each participating employer versus a stand-alone plan. The PPP typically provides a standardized investment lineup for all participants, which also may reduce overall costs via economies of scale.

There’s a certain level of efficiency for the employer, but they’re still required as a fiduciary to oversee the pooled plan provider and monitor how their participants are utilizing the program.

Beth Halberstadt

Senior Partner, U.S. Investments Defined Contribution Solutions Leader

Aon

Each PEP typically has a standard plan document and plan design, but providers can offer participating employers flexibility around features, such as the level of company match. The level of flexibility often depends on employer size. PEPs designed for smaller companies typically offer less flexibility than those built for larger companies. For example, some PEPs for small employers might need to meet the Department of Labor’s safe harbor formula for calculating matching contributions or use a specific payroll system. Large-employer PEPs, however, are more likely to provide flexibility in plan design and can fully integrate with many payroll providers. Aon has designed its PEP to offer the flexibility required by larger employers.

The PEP’s investment lineup is typically similar for all participating employers, though some customization may be available based on an employer’s participant profile. Common features include access to a self-directed brokerage window, the availability of managed accounts and financial well-being tools. In addition, participant interface and communication channels are typically consistent across all employers.

"By embedding these standard features, PEPs can provide high quality and accuracy in their daily functioning and meet ongoing reporting requirements. In effect, a PEP can eliminate processing and compliance errors that can potentially trip up an employer that is managing its own 401(k) plan," Halberstadt explained.

For employers, having the flexibility in plan design to meet participant needs while using a common platform produces a replicable high-quality participant experience.

Read: Collective Retirement Plans Create Value in a Changing Landscape

Listen: On Aon Podcast: Improving Retirement Outcomes

II

II. EVOLUTION OF POOLED PLANS

Pooled retirement plans have been around for decades, but for much of that time, organizations that wanted to participate together in a retirement plan had to be in the same or related industry or have a common nexus. Multiple employer plans, or MEPs, have been popular in industries such as building and construction, retail trade and service, manufacturing, mining, and trucking and transportation.

We characterize SECURE 2.0 as proof of concept. We took that as a nod of support from Congress that PEPs were working, and they saw evidence that they were adding value and wanted to extend it [from 401(k) plans] to the 403(b) not-for-profit employer community.

Rick Jones

Senior Partner, Leader of the Aon PEP and DC Solutions

Aon

"By removing the two limitations that had hindered more uptake of MEPs, the SECURE Act — arguably the most impactful DC retirement legislation enacted since the Revenue Act of 1978 established the 401(k) plan — expanded the value proposition of pooled employer plans for virtually every employer," Jones said.

Seeking additional ways to enhance retirement programs and savings, legislators continued to explore related initiatives. Their efforts led to SECURE 2.0, signed into law in December 2022, which expanded the use of PEPs to 403(b) plans for employees of nonprofit organizations and educational institutions. Other provisions of SECURE 2.0 included expanding auto-enrollment in 401(k) and 403(b) plans and raising the required minimum distribution age.

The passage of SECURE 2.0 was evidence that the plans were adding value to employers and employees, expanding the opportunity for more workers to save and prepare for a secure retirement.

Read: Retirement Planning: Transitioning to SECURE 2.0

Many employers may not be fully aware, but there are increasing fiduciary, compliance and litigation risks associated with today’s 401(k) and 403(b) plans. For those serving in a fiduciary capacity, the level of personal accountability being assumed can be substantial and misunderstood. “We’ve seen significant changes and risk patterns play out in the defined benefit plan space for a few decades now, and that trend is increasing for defined contribution plans as well,” said Jones. This is another tailwind for the adoption of PEPs as a viable retirement offering.

See Aon’s white paper, Fiduciary and Litigation Risk in Today’s 401(k) and 403(b) Plans.

Source: AON

 

III

EVALUATION AND SELECTION

In the case of a spinoff organization, being able to effectively plug in to a retirement plan by utilizing a PEP can provide the needed expertise.

“We’re finding significant traction within the small- to mid-[sized] employer market as well as those organizations involved in corporate transactions like spinoffs,” said Jones. Leaders working in the small to mid-sized market often don’t have expert 401(k) and 403(b) staff in-house, he noted. And in spinoffs, the new retirement benefit program can be easily implemented, subject matter experts don’t need to be hired and trained, and there is more opportunity to focus on the core of the new business venture.

While the SECURE Act opened the door for the expansion of PEPs to virtually any kind or size of employer, it put the responsibility for selecting and monitoring the pooled plan provider on the shoulders of the employer. What’s more, with more than 100 PPPs in the market offering a total of over 350 PEPs, it’s a challenging job for plan sponsors to evaluate the range of PPPs available to them and select one.

The first step for most employers is to issue a request for proposal. The RFP seeks information about the capabilities of each PPP along with detailed information on cost and fee structures. In addition, the RFP should ask for information on the plan-design flexibility and all participating vendors for the PEP, such as the record keeper, investment advisor, investment managers, plan administrator, and audit partner.

The advice to plan sponsors [from third-party PEP evaluators] is valuable because of their independence.

Alex Xie

Pooled Employer Plan Market Leader

Aon

Plan sponsors considering PEPs can use the services of independent third-party evaluation firms to help navigate the selection process — an industry segment that has emerged since the first SECURE Act was passed in 2019. While each provider of a PEP can typically provide information that compares it with a single-employer plan, third-party evaluators are able to compare the different PPPs with each other, as well as the specifics of each of their PEPs across a range of criteria.

One of the most critical factors in the decision to join a PEP is the cost — and cost assessment requires a careful examination by the plan sponsor. It needs to be an apples-to-apples comparison, taking into account that PPPs have different approaches to fees — asset-based fees, fixed fees or per-participant fees.

Third-party evaluators can assist in this critical area of fee due diligence — and help determine the complete set of fees involved in PEP participation on an annual basis. The bottom line should be that an employer should get a clear view of total annual plan costs, regardless of how the fees are set.

“You want to see total plan costs, the all-in fee across all the service providers, fund managers, everything wrapped in together,” said Alex Xie, PEP market leader for Aon’s U.S. West region. “That’s how you can [best] compare one PEP to another, by adding all the service provider and fund manager fees and comparing them on a side-by-side basis.” In other words, employers need to understand holistically the all-in cost for all service providers, the fund managers and the PPP itself.

One of the most important due diligence tasks for an employer is understanding the investment management capabilities of the PPP, whether managed internally by the provider or outsourced to an external 3(38) fiduciary that acts as the PPP’s investment manager. In either approach, the PEP should provide plan participants an investment menu that allows them to build well-diversified portfolios.

“It’s important for the employer to evaluate the capabilities of the investment fiduciary, whether that’s the PPP or the delegated 3(38) fiduciary that’s part of the PEP, because they’re the ones who are going to dictate the investment lineup for the plan,” said Xie.

“You want to be sure all the bases are covered,” he said. “That means having diversified investment options in the lineup, such as target-date funds, index funds and actively managed funds for those participants who want active management. A good PEP would be able to offer a diversified menu that suits the needs of diverse investor types, whether that’s an early career employee starting their savings journey [or] a retiree who is drawing down their 401(k) savings for income, and everyone in between.”

PEP investment lineups typically include a capital-preservation option, fixed-income options and equity options that provide access to small-, mid- and large-cap stocks. In addition, the menu is likely to include both passive and active fund options, and it may have access to a brokerage window for self-directed investors.

IV

CHECKLIST OF RESPONSIBILITIES

The three responsibilities that remain with the employer in a PEP context are selecting the plan design, funding payroll and employer contributions, and then monitoring the pooled plan provider.

Rick Jones

Senior Partner, Leader of the Aon PEP and DC Solutions

Aon

The PPP takes on administration and compliance tasks, determines the investment menu and creates relevant participant communication. It drafts and maintains plan documents including a summary plan description, or SPD, negotiates with service providers, responds to regulatory or legislative changes and monitors the investment lineup.

Form 5500 filing: The PPP annually files the all-important Form 5500 with the Department of Labor. This plan summary provides regulators with information on the qualification of the plan, its financial condition, investments and operations. It also includes information on participant counts, asset levels, fees paid and service provider relationships.

Source: https://www.irs.gov/pub/irs-pdf/f5500.pdf

Plan design: The PPP will typically decide what automatic features — automatic deferrals and auto-escalation, for example — will be offered. “In terms of plan design, in an individual plan, you may choose to not offer some of the automatic features, such as automatic deferral or automatic escalation, whereas you may find in some PEPs, those features are turned on for all participants,” Halberstadt said. PEPs designed for larger employers will have design flexibility, customizable by employer, that is similar to the options available in single employer plans.

The PEP will also specify features such as loan availability and access terms and the plan’s approach toward terminated or separated employees. “As you look at plan design, as long as the PEP has flexibility where flexibility is valuable, and stability where delivering accuracy is greatly valued by participants, that may lead to a better experience for the participants,” she said.

Investment menu: After the initial structuring of the investment menu, the PPP will, on an ongoing basis, determine if and when to add new or different asset classes, terminate a manager for underperformance and hire a new one, and decide whether to add new features, such as a brokerage window.

Participant communication: The PPP is responsible for communicating with plan participants about the investment menu options, investment performance and plan features — such as financial well-being products or services — as well as any plan updates or changes.

V

IMPLEMENTATION AND MONITORING

For DC plan sponsors, a major benefit of joining a PEP is that plan implementation is straightforward. The PEP’s standardized features and functionality make the plan setup easier and faster because the onboarding process doesn’t have to be customized for every participating employer.

Step one for plan sponsors is signing an adoption agreement with the pooled plan provider that states the employer agrees to participate in the PEP and outlines the roles and responsibilities for both the employer and PPP. The agreement also specifies a key shift in the employer’s status from plan sponsor to participating employer in the PEP, while the PPP assumes the role of plan sponsor.

The plan sponsor role is morphed into a participating employer role for the organization that’s participating in the PEP. And the PPP takes on that plan sponsor role and all the associated responsibilities.

Rick Jones

Senior Partner, Leader of the Aon PEP and DC Solutions

Aon

At the start of the process, the PPP’s implementation team will work with the employer’s current providers, such as the record keeper, if the employer has an existing 401(k) plan; the payroll administrator; and auditor. The PPP team handles all legal, regulatory and compliance issues, such as documenting plan amendments and, if relevant, the process of merging a single-employer plan into the PEP. While onboarding the employer to the PEP platform, the implementation team aims to provide smooth adoption of all functions, including participant access to the investment menu and plan tools, ensuring contributions are being received and invested, and plan communication.

The time to get up and running on a PEP can vary depending on the size of the employer, but the process typically takes anywhere from three to six months. “Generally, we prefer four months,” Xie said. “But sometimes for larger plans we prefer [the process take] a little bit longer, and for smaller plans, you can do it a little bit faster.”

Watch: What Are Clients Saying About the Aon PEP?

A PEP’s investment menu is typically structured to appeal to a broad base of employees at different stages of their savings and spending lives. They include those early in their career, who are likely to be spending more and saving less; those in mid-career, when spending remains high but savings increase; and those late in their career, when spending may decline yet savings remain high.

Similar to single-employer DC plans, PEPs typically utilize target-date funds, or TDFs, because they are well-diversified investment vehicles that have a dynamic glidepath. For example, a target-date fund with a 20-year horizon will initially be weighted more toward riskier assets, such as equities, and less toward conservative vehicles, such as fixed income. However, as the years pass, participants in that TDF will see their investment mix shift to a heavier weighting of income and capital-preservation strategies with less exposure to equities.

In addition, similar to single-employer plans, PEPs provide a default vehicle — typically a target-date fund — for plan participants who don’t make an investment election for the plan.

Typically, the PEP’s investment lineup will include equity strategies, in both active and passive funds, and fixed-income strategies, which may be in active and passive vehicles. Equity options should offer access across the entire U.S. market cap — small-, mid- and large-caps — as well as non-U.S. equity options and possibly an emerging markets strategy. Fixed-income options could include core and core-plus, potentially offering access to government securities as well as corporate bonds, from investment grade to high yield.

Some PEPs also provide access to a self-directed brokerage window, which can be appealing for some employers who would like to provide the option for employees who want a more active role in their investing.

Importantly, under the SECURE Act, participating employers in a PEP are required to meet their fiduciary duty in overseeing the pooled plan provider on an ongoing basis. They are also required to oversee how their participants are utilizing the program.

As the regulatory directive didn’t specify the approach to monitoring a PEP, providers are supporting employers with this compliance in different ways. Some provide quarterly reporting, while others provide bi-annual or annual reporting. The most widely accepted trend is annual reports, however, participating employers should be able to ask for more frequent reporting on the PEP, should they require it.

“From a monitoring standpoint, [the Aon PEP’s] standard process is to deliver reporting on a quarterly basis,” said Xie. “Not every client is going to want to have a meeting every quarter to review the results. Some want to meet once a year, and that’s ok. Each client can determine how often they want to meet and review the reports.”

The substance of the reporting information is important, regardless of how frequently it is delivered. It should include data on investment performance, participant demographics and behavior, and any operational changes that the PPP has either planned or made, such as changes to service providers.

Investment performance is, as expected, a critical area of monitoring for participating employers. Each PPP should present regular updates on investment performance against benchmarks for all assets in the program. Periodically, quarterly or biannually, employers should review how their employees are investing and whether they are utilizing the full range of investment options — from TDFs to the brokerage window.

Beyond the investment lineup, employers also need to ensure that payroll contributions are being processed in a timely manner and are allocated appropriately, according to the investment contributions specified by each participant. In many cases, employers will know whether these functions are being handled properly because of participant feedback, according to Halberstadt. But employers should ensure the PEP’s participant communication channels and messaging are appropriate and meet participant preferences.

“Your pooled plan provider is a pretty significant vendor,” said Halberstadt. “It’s important to stay engaged with them, get regular reports that are needed to make assessments, and that you keep in tune with what your participants are doing and experiencing. And then, assessing how you think that lines up with what’s available in the marketplace.”

Best practice is to make sure that the pooled plan provider is delivering value.

Rick Jones

Senior Partner, Leader of the Aon PEP and DC Solutions

Aon

VI

POOLED PLAN PROVIDER PROFILE: AON

Following the passage of the SECURE Act in late 2019, Aon was one of the first firms to embrace the idea of PEPs. In fact, Aon was a strong supporter of the concept on Capitol Hill and in the industry in the years leading up to the act’s passage. The following year, when the DOL issued a request for information to providers about their plans, the firm delivered a complete assessment of its PEP structure, operating plan, fee arrangement and vendor relationships. To deliver its PEP services to participants and their employers, Aon partners with Voya Financial, a top record keeper in the retirement plan industry, and audit and advisory firm Grant Thornton.

Today, over 70 employers are either a part of or are implementing the Aon PEP, which covers approximately 59,000 employees and has over $2 billion in assets under management.

“Aon’s PEP has the ability to deliver a customized and comprehensive benefit with less work required of employers, less risk around fiduciary compliance and other concerns, and ultimately, better retirements for American retirees,” Jones said. It’s less work because the PEP takes on fiduciary, operational and administrative responsibility. The PEP bears the risk of any potential compliance or regulatory breakdown, which means less risk for employers. And it can potentially produce lower costs by combining or pooling plans. The Aon PEP produces potential economies of scale to drive down fees and deliver better value, he said.

Aon has pegged average total plan cost savings in the 40% range for employers in its PEP. “Aon is making the fiduciary decisions in operating the plan on behalf of all the participants and employers that participate in our solution,” said Xie. “We utilize our expertise and skills in this space to deliver value to our clients. Part of the benefit of utilizing the PEP is that the plan sponsors no longer have to do their own individual plan audit every year. That can be delegated to us as a pooled plan provider.”

Read: The Aon Pooled Employer Plan: An Inflation Fighter

Aon’s PEP design allows customization in key plan features, such as eligibility, matching and other contribution levels and vesting. “We worked hard to ensure that the plan design features that are most valuable to a plan sponsor can be customized to their plan,” said Halberstadt. “We wrote our plan document to give them that flexibility. For example, the level of company match that they wish to give to their employees, that’s really a personal decision for each employer.”

We provide automatic reports to individual employers, and we have client service executives who reach out periodically to have an open dialogue with the employer to make sure that we’re meeting their needs.

Beth Halberstadt

Senior Partner and U.S. Investments Defined Contribution Solutions Leader

Aon

Each employer participating in the Aon PEP is paired with a team led by a client service manager who acts as the single point of contact. This executive proactively reaches out to the employer on reporting, monitoring and updates. Each Aon client can also access the broader PEP team of investment, operational, compliance, legal and communications professionals.

Each employer receives quarterly investment updates, relative to the fund benchmarks. The updates include data on how participants are investing and other plan statistics; information on available services; and any upcoming improvements or changes, such as implementing SECURE 2.0 provisions, new features from the record keeper or operational changes. “If they have any questions on the quarterly reporting that they receive, we’re available to answer those questions and have an ongoing dialogue,” Halberstadt said.

Learn More: Pooled Employer Plans

VII

WHAT’S NEXT

Pooled retirement plans and collective retirement plans have enjoyed wide adoption outside of the United States, in countries such as Australia, the U.K. and Ireland. With the impetus from major retirement legislation — the SECURE Act in 2019 and SECURE 2.0 in 2022 — more workers in the U.S. are likely to access pooled retirement plans over the next several years, according to Aon.

U.S. lawmakers and retirement industry leaders have been able to learn lessons from their international peers about critical PEP components — such as compliance, plan structure and features — helping them regulate and provide an attractive alternative retirement plan choice for single-employer plans. The retirement plan industry has risen to the occasion, with an ongoing flow of new entrants as PEP providers — many of whom are expected to push the envelope on PEP plan design.

Still, although lawmakers have made great strides in expanding retirement plan opportunities for working men and women, the job is not complete.

“Kudos to Congress for SECURE 1.0 and SECURE 2.0, which enables the improvement of retirement plan coverage and retirement outcomes through PEPs and other provisions,” Jones said. “We’re doing everything we can to do it right, and we need legislators and regulators to be with us in that. We’ve got no indication that they’re not.”

The PEP concept has been tried and tested in many other countries around the world. We have been implementing pooled defined contribution plans in several countries, so we know how effective they can be. And that’s going to happen in the U.S. as well.

Alex Xie

Pooled Employer Plan Market Leader

Aon

The industry has seen an increasing flow of retirement assets into collective investment trusts (CITs). CITs are tax-exempt, institutional-level pooled investment vehicles. CITs have been available as an investment option for 401(k) plans and, under the SECURE Act, for 401(k) PEPs as well. However, neither stand-alone 403(b) plans nor 403(b) PEPs are currently qualified to use CITs, despite active lobbying by the retirement industry — and these efforts with legislators are continuing apace. The issue to make CITs available to individual 403(b) plans and 403(b)-employer PEPs is on the front burner in Washington, with the industry hopeful that it will get a stamp of approval from lawmakers and level the playing field on the 403(b) side as well.

Beyond that, providers continue to research and innovate with the structure of PEPs — a retirement plan approach that’s still in its infancy in the U.S. Two areas that are likely to see advancements include customization and flexibility. With further adoption and standardization of PEPs in the U.S., providers will be able to better understand nuances within different segments of the workforce and come up with ways to better serve them within the collective wrap. PEP platforms can become more sophisticated and more robust, leading to more customized and flexible solutions at a participant level.

On the customization front, the PEP’s investment menu could offer participating employers the ability to turn on or off a brokerage window, depending on the needs of their workforce. Similarly, future PEPs could provide access to different types of target-date funds, some active and some passive, within the overall investment menu that would be most appropriate for specific participant demographics. Looking further ahead, PEP providers might offer retirement income solutions, in light of the DC industry’s strong focus on the decumulation phase of their plan participants and addressing their financial needs in drawdown years.

While any innovation in structure and offerings of PEPs may need regulatory approval, the DC industry has been encouraged by the passage of the SECURE acts, which points to the high priority placed on retirement security by lawmakers in Washington, D.C — and expects that focus will continue to help move forward the collective-plan approach.

“We would look for a partnership with the regulatory agencies as they get to the right regulatory perspectives and processes going forward,” said Jones. “We think further synergies and economies of scale will result from that.”

Learn more 
Hear from current PEP clients on implementation, on-boarding and the general Aon PEP experience. You’ll also find the latest insights and next steps if you’re considering joining a pooled employer plan.

VI

GLOSSARY

IX

Quiz

Test your knowledge of pooled employer plans based on the information provided in this Guide. It offers a brief recap of key areas of information related to PEPs.