With the passage of SECURE Act 1.0 in 2021, pooled employer plans allowed nonaffiliated plan sponsors to join a pooled plan like a multiple employer plan that can be organized by a financial institution or advisory firm. Defined contribution plans make sense because they pool assets and administration of many employees; MEPs and PEPs do the same thing except at the plan level.
The benefits of PEPs and MEPs include:
- Cost savings
- One audit
- Single 5500 filing
- Less administrative work
- Limited liability and greater fiduciary protection
- Streamlined investment lineup
Intended for smaller companies, PEPs are attractive to larger entities that are concerned about liability and lawsuits and want to offload administrative work. Cost savings have not materialized like expected as smaller companies can now get very favorable pricing either from fintech record keepers or traditional providers as well as access to low priced CITs. For plans with 100 or more participants (eligible employees), audit costs are less but they do not go away.
Along with a record keeper, a PEP requires a pooled plan provider (PPP) which is technically the plan sponsor offering 3(16) fiduciary administrative services. The PPP or an advisor or third party can offer 3(38) investment fiduciary services.
PEPs can vary widely by fees charged, which can include a flat fee or asset based that can be reduced based on the number of plan sponsors, and flexibility – PEPs may limit loans, for example, or require safe harbor provisions. The level of customization for each company may affect price with larger entities having more leverage.
Currently, 403(b) plans may not offer a PEP though that could change with the passage of SECURE Act 2.0 expected by the end of 2022. Groups of plans, a type of multiple employer plan, are akin to PEPs but on training wheels – single 5500 filing and investment menu but no single audit or 3(16) PPP required.
Each PEP can have one advisor, especially if organized by that advisor, or each plan may select their own advisor with separate agreements and payment.
Record keepers, TPAs, broker dealers and RIAs may become a PPP though most filings have been with the first two with the others waiting to see how the market develops or just partner with a provider. There are entities like Salus formed specially to be a PPP and Smart Pension which is also a record keeper.
Some experts believe that the PEP market has developed more slowly than expected due to the pandemic, high inflation and student loan debt limiting employees’ ability to contribute, as well as lack of focus by small business owners and managers. But Paychex claims that half of its sales are through their PEP and Lockton is said to have attracted $5 billion by the end of 2021 mostly through larger plans.
With the advent of state mandated plans and incentives, the small plan market could greatly expand with an estimated five-six million companies beyond just a few employees without a retirement plan which would be ripe for PEPs. Many retirement plan advisors that generally work with plans that have more than $3 million and have a minimum fee requirement may use PEPs to work with smaller plans especially if partner with benefit and P&C firms as well as wealth advisors. In fact, many RPA aggregators are owned by benefit and P&C firms where 80-90% of clients have less than 100 employees.
So what should an advisor do? Most will not become PPPs while others might become the PEP’s 3(38). So far, RPAs have taken a wait-and-see approach likely to use the PEPs offered by their broker dealer, or favorite record keeper or TPA.
The attraction of PEPs, though, is overwhelming even without significant cost savings and something that advisors should watch closely whether a specialist RPA or wealth advisor looking to serve wealth clients that own or run a business especially in states like California, Illinois and Oregon which have state mandates.
