Pooled employer plans or PEPs are part of a genre called group plans which started with multiple employer plans or MEPs and include group of plans or GOPs but do not include multiemployer plans used for unions plans. Some industry experts like Faegre Drinker’s Fred Reish predict that at least 80% of employers could have their retirement plan needs met by a PEP.
But logic does not always turn into reality – overhauling the massive defined contribution industry which has over 100 million accounts, 735,000 plans and $12.5 trillion is easier said than done.
Understanding why some products and services have revolutionized the DC market and others, like HSAs, cash balance and non-qualified plans, have not, even though many pundits predicted they would, may be helpful.
Moving from institutional investment vehicles like SMAs to mutual funds had massive implications, activating providers, advisors and plan sponsors. They enabled employers to shift costs to participants, allowing them to look up results in the newspaper in the 1990s while providers like Fidelity funneled assets into proprietary funds. It’s very questionable whether they helped participants but, like the fading annuity wrapper used by insurance providers, mutual funds greatly expanded small plans and access.
Advisors focused on the Triple Fs (fees, funds and fiduciary) began to emerge in the late 1990s, which led to the creation of the current retirement plan advisor model. Plan sponsors concerned about cost and liability and not qualified to evaluate funds were attracted to these specialists, who used these features to build their businesses.
Auto feature adoption heated up after the 2006 Pension Protection Act provided a safe harbor, which in turn led to the growth of target date funds as the default option. Education and incentives could not overcome inertia – the ideal plan has resulted in significant increases in participation, deferrals and assets, which have been good for employers, workers, advisors and providers.
Do PEPs have the characteristics to fuel the next wave of massive change?
Logically they do. The entire reason DC plans work is that 15 times more people save for retirement through payroll deduction with participants aggregated by plan and record keeper provide economies of scale and efficiencies. PEPs are just another take on aggregation enabling plan sponsors to offset more work and liability to a Pooled Plan Provider and get better pricing once that PEP has achieved scale.
It all makes sense, right? Aren’t PEPs the perfect solution to handle the explosion of small plans due to state mandates and tax credits drawing in wealth advisors who have no interest in becoming an RPA specialist while providing safety in numbers for larger plans concerned about litigation who also want to outsource more work?
But there are arguments against PEPs as well as the mighty force of inertia.
Plan sponsors lose some, not all, ability to customize their plan which may be over-emphasized over overcome by simplicity, cost and less liability. PEOs offer similar advantages for handling all benefits and HR issues yet just 2.4% of all US workers are in one with 17% of workers in organizations with 10-99 employees.
Kelly Michel who helped build Transamerica’s MEP business claims the average wholesaler close rate at Transamerica for single plans was about 15%, which skyrocketed to 65% for their group plans, driven by inquiries sent to their call centers. Yet most of those plans were in PEOs already. Even Terry Powers, CEO and Founder at Platinum 401(k), a leading PEP provider, admitted each plan must be sold one at a time.
Jason Roberts, who co-founded GPS with Pete Swisher, a leading PEP provider and advocate, says PEPs are being adopted by smaller banks, RIAs and CPAs with centralized service centers – these firms are not hunting, they are cross selling existing clients.
Some aggregators, especially those owned by benefits and P&C shops which have smaller clients, have created a PEP while broker dealers like MassMutual and Commonwealth have partnered to start their own PEP likely to serve wealth advisors not focused on DC plans as have many other firms like LPL, Merrill and Cetera.
But adoption has been slow, as advisors lucky enough to be part of firms with home office support may prefer to just outsource fiduciary and service to make sure their wealth clients are being taken care of. Advisors representing plans who do not have access to a PEP or are not comfortable with or understand them, not to mention TPAs not serving as a PPP, will be loath to recommend them. Very few plans, especially smaller ones, ask for or even know about PEPs.
Published by the Georgetown Center for Retirement Initiatives, Gallagher consultants reviewed the current state of PEPs which had almost $10bn at the end of 2023 and is estimated to have grown to $17bn by the end of last year which would still be just 0.14% of DC assets. The number of PEPs filed with the DOL is over 500 with AON’s $3.2bn PEP on track for over $4bn soon is estimated to be the largest according to Senior Partner Rick Jones who claims that PEPs are on track to replicate adoption of cloud computing – Gallagher consultants estimate it could take as long as 10 years.
So there is no doubt that PEPs have a place in the complicated DC food chain just as HSAs have and will but there are many forces that may keep it from covering 80% of all employers as Reish predicts who suggests that any advisor with a significant amount of runway left in their career would be wise to embrace PEPS mainly for two reasons: because it is the right thing to do and to remain competitive.
But if Reish is correct, and he predicted the fiduciary tsunami by advisors, then PEPs will accelerate the already fast moving consolidation of asset managers, advisors and TPAs with those late to the game not able to catch up, like with TDFs, who will be advocating against PEPs all the while.