Firms readying for PEP launch despite the lack of DOL rules

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.

Though the jury is still out on the need for exemptions, service providers are moving forward, reasoning that the law is on their side.

"The PEP law goes live under a good faith standard Jan. 1, 2021, so in order to be able to do this, people are already working now," said David Levine, a principal at Groom Law Group in Washington, adding that he is working with many clients to launch the plans.

Mr. Levine anticipates that the DOL will be flexible and accommodate different PEP models to spur a thriving environment for the new plans. "I'm hopeful that anything they say will encourage a robust marketplace," Mr. Levine said.

Aon's proposed PEP already has generated a great deal of interest among existing and prospective clients, according to Rick Jones, a senior partner at Aon in Chicago. "We are finding that the PEP message is really resonating across all sizes of clients and prospects," Mr. Jones said, adding that Aon's pooled plan is aimed more at employers with existing retirement plans than those without them.

The PEP will offer a broad range of investments, including target-date funds with various investment managers as well as index funds. The company, however, has not yet determined whether it will offer its own proprietary investment products as it hasn't finalized the investment lineup.

If it does offer proprietary products, it could raise potential conflicts that might require a prohibited transaction exemption, according to legal experts. "Whether or not you need a new exemption from the Department of Labor is a question that I think a lot of folks in the industry are struggling with right now," said Michael Hadley, a partner with Davis & Harman LLP in Washington. "Some think we can make that work without anything new from the Department of Labor through various strategies, and some say, no, we really are going to need an exemption from the Department of Labor in order to make that work."

Aon, which selected Voya Financial as the record keeper for the PEP, will use Aon Investments USA Inc., its investment services group, as the 3(38) investment manager, an arrangement that could require an exemption, according to legal experts. "There are different people taking different stances," said Mr. Levine, adding that some are saying that a pooled plan provider cannot do investments while others say they can. "There's all these different spins on it," he said.

Mr. Levine noted that while Aon plans to serve as both the P3 and 3(38) investment manager, it does not provide details as to how the PEP will function. There are multiple ways to structure a PEP to avoid conflicts of interest by ironing out "who gets paid what, when and where" and how compensation is approved and disclosed, he said.

"There are some people who believe a pooled employer plan is a cookie cutter," he said. "I can tell you in my experience in working with people that there are dozens of models for a PEP because of these exact issues."

Regulatory questions aside, Aon's announcement came as no surprise to industry observers. "I know there are lots of providers that are looking at a strategy for PEPs, so it's not surprising to me that folks are trying to get their name out there quickly," Mr. Hadley said.

Service providers are moving forward in the hope that they will get clarity from the DOL on its thinking with regard to proprietary products and other potential conflicts before their PEPs launch, according to industry experts.

"I don't doubt that those who are actively engaged in creating PEPs right now will have to tweak their model somewhat," said Pete Swisher, president of fiduciary consulting firm Waypoint Fiduciary LLC in Versailles, Ky. "I'm sure that they will in some way alter what they're doing but I don't think it'll alter their fundamental product design."

If, in a worst-case scenario, the DOL comes out with unexpected guidance, Aon and others could hit the pause button.

"That would certainly be an issue that we would need to contend with," Aon's Mr. Jones said, referring to any surprise DOL guidance.