Despite regulatory uncertainty, organizations are diving into what many believe will be a robust market for pooled employer plans.
Aon PLC last month announced its intention to launch a pooled employer plan, or PEP, on Jan. 1, becoming the first high-profile company to do so. Other lesser known firms have made similar announcements, including The Platinum 401k Inc., the marketing arm of $450 million Clearwater, Fla.-based third-party administration firm American Pension Services LLC.
The new breed of multiple employer plans that they're looking to bring to market come compliments of 2019's SECURE Act, which made the plans possible. As envisioned under the legislation, the anticipated new plans will make it more attractive for employers in unrelated businesses to join a collective or pooled retirement plan for their workforces, a move that will allow them to reduce administrative duties and lower retirement plan costs through economies of scale.
The early first movers in the PEP market, however, may be moving a little too fast. While Aon and others that have announced plans to launch PEPs will serve as the pooled plan provider or P3, nothing is official until registration with the Department of Labor. All are waiting for the DOL to set up a registration process.
More importantly, they're waiting for regulatory guidance from the DOL as to possible prohibited transaction exemptions they might need to run the PEPs. Lingering legal questions persist as to whether P3s and others serving the new pooled plans will need exemptions — apart from those that already exist — to do their jobs and get paid for it, according to legal experts.
One of the biggest concerns is that plan sponsors use the money in the plan for the wrong purposes. To address this conflict of interest, ERISA prohibits plan sponsors from paying their service providers from plan assets unless it's specifically permitted by prohibited transaction exemptions.
Robert Toth, principal of Toth Law in Fort Wayne, Ind., describes the thinking as ERISA's "squat rule." "You can't get paid squat from a retirement plan unless it's specifically allowed someplace," he said.
For PEPs, those restrictions raise a host of questions. Because PEPs are a new type of plan, it's not clear that any existing exemptions will cover the special relationships being created, Mr. Toth said.
PEPs also raise other potential conflict of interest concerns, including whether the P3 can serve in the dual role as the 3(38) investment manager and whether proprietary products by service providers can be used in investment lineups.
The uncertainty is such that the DOL in June released a request for information asking for industry input on possible conflicts that service providers might have in operating PEPs and whether any additional exemptions might be needed to facilitate the growth of the market. The comment period ends July 20.