Pool Party

A growing numbers of insurance brokerages and carriers are offering their employer clients retirement plans that pool multiple businesses into a single defined contribution retirement savings plan.

The plans, known as pooled employer plans (PEPs) are authorized under the federal Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. They reduce employers’ administrative burden, costs, and potential regulatory liability by amortizing costs over a larger number of employees; by handing off time-consuming plan management design, administration, and compliance duties to third-party specialists; and by offloading a host of associated fiduciary and regulatory risks.

There were 427 PEPs in the United States at the end of March, according to an analysis of U.S. Department of Labor data by RS Fiduciary Services, says Robb Smith, president of RS Fiduciary Solutions and PEP-HUB, which provides PEP consulting services. That compares to 319 PEPs in January 2023 and 202 in January 2022, Smith adds.

Brokerages that have begun offering new PEPs to clients in the past year alone include Hub International (the company’s second) and Woodruff Sawyer. Other providers in the market include brokerages Aon, Henderson Brothers subsidiary HB Retirement, Lockton, NFP, and WTW, as well as carriers such as Ameritas, Principal, The Standard, and John Hancock, Smith notes.

Brokerage executives interviewed for this article give varying reasons for offering PEPs. For brokerages that already offer extensive employer benefits or investment services through multiple employer plans (MEPs), a PEP predecessor, it is a relatively small step to offer pooled employer plans. Some brokerages say their employer clients are demanding PEPs or that they want to enable clients that are not offering retirement plans to their employees to do so. Others want to keep competing financial services providers from making potential inroads into their client relationships via PEPs.

“It’s all of those reasons, and it’s also because we do want to help reduce costs for our clients,” says Kristina Keck, vice president and practice leader of retirement plan services at Woodruff Sawyer, which is signing up its first clients to a PEP launched in February.

More generally, Smith and others say, PEPs are now a part of the retirement benefits financial landscape that brokerages should, when appropriate, present to clients as a possible retirement benefits solution.

“When people have that opportunity to save through a workplace program, they are more likely to do so,” says Patrick Rieck, Hub International vice president for product, retirement, and private wealth.

A Variety of Broker Roles

Even prior to passage of the SECURE Act, employers could band together to offer multiple employer plans with the help of third-party sponsors, sometimes industry associations, which take on the responsibility and liability for running the plans. However, MEPs require “that all employers participating in the MEP have a common nexus of interest. For example, businesses within the same industry (food service, construction, etc.), geographic area or who are affiliated through an association or PEO can join a MEP that allows them to design a plan with unique benefits for their employees,” notes a description of MEPs and PEPs by Ameritas.

The SECURE Act removed those limitations for 401(k) plans, and PEPs began forming in 2021. Passage of the SECURE 2.0 Act in December 2022 extended PEPs’ availability to organizations covered under another Internal Revenue Code provision, 403(b), which includes public education organizations, some nonprofit employers, and cooperative hospital service organizations.

Offering a PEP also involves navigating complex U.S. Department of Labor-administered retirement plan rules under the Employee Retirement Income Security Act of 1974 (ERISA); U.S. Securities and Exchange Commission regulations for offering securities and for 401(k) and 403(b) plans; and normal employer benefits plans obligations.

Navigating these regulations is just one of the ways a broker can provide value to clients looking to offer these plans. A PEP has several key roles, allowing brokerages to participate in different ways according to their capabilities and preferences. These roles include:

Pooled Plan Provider: The pooled plan provider (PPP) is the named fiduciary that has discretion over plan administration and investments and can select and monitor third-party vendors hired to deliver services for the PEP, including trustees/custodians, recordkeepers, investment managers, and external advisors such as plan auditors. Aon, for example, serves as the PPP for its plan. There were 150 PPPs as of the end of March, Smith says.

Recordkeeper and Third-Party Administrator: Recordkeepers, and/or third-party administrators, administer the plan, provide the technology platform and plan documents, and complete the Department of Labor Form 5500 on employer benefit plan returns. For instance, Ameritas is the recordkeeper and administrator for its PEP, notes Scott Holechek, a vice president of institutional sales at the company.

ERISA 3(38) Investment Manager: These entities make the investment decisions for plans on a discretionary basis. One of the registered investment advisors (RIAs) owned by Hub, for example, was hired by two different PPPs as the ERISA 3(38) investment manager for PEPs they sponsor and sell through Hub Advisors, Rieck says.

Adopting Employer: An individual employer that joins a PEP can reduce its operational and fiduciary obligations. The degree to which it can reduce these obligations depends on the PEP’s business model. For instance, some PEPs may require the adopting employer, instead of the PPP, to hire the ERISA 3(38) investment manager. This means the adopting employer would have the responsibility to monitor both the PEP and the investment manager.

Another role for brokerages that do not want to be directly involved in PEPs is to become a gatekeeper for their clients considering such plans, says Joel Shapiro, president of NFP Retirement, which has three PEPs and was recently acquired by Aon. “You conduct the due diligence on the different PEPs that are offered for your client and then make a recommendation to them,” he says.

Brokerages looking at PEPs must consider which roles they wish to fulfill. Serving as PPP is appropriate only for organizations with extensive retirement plan management experience and qualifications.

For brokerages that want to offer pooled employer plans to clients but do not intend to be the provider, selecting the right PPP is key, says Smith, whose firm provides matchmaking services to PEP service providers. Pooled plan providers should be financially strong, accept fiduciary oversight, be diligent in selecting experienced service providers, and show a track record of successfully growing pooled retirement plans, thus sparing partners the dangers of unpleasant “lessons” early on and adverse results for their clients such as failure of the PEP, he adds.

Different PEP partners may be appropriate for plans targeting larger or smaller employers. Transamerica is the recordkeeper for Hub’s PEP aimed at larger businesses with more than 100 employees, given Transamerica’s experience working with larger employers, Rieck says. Likewise, NPPG Plan Professionals, the pooled plan provider, was a good fit for a PEP targeting larger employers because, Rieck says, “their business model is more hands-on and they can address the particular needs of larger employers and the more complex situations that they run across as larger employers.”

Smith says it is also important that PEP employer clients understand that they cannot offload all plan duties. On its website, Aon emphasizes to prospective PEP employer members that “you will still need to retain the fiduciary role of selecting a PEP and overseeing and monitoring the PEP and its performance…. Employers also determine plan design and contribution levels, and must send payroll and contributions.”

Growth and Consolidation

Larger PEPs are already becoming quite sizable. As of March 31, Aon PEP had 82 participating employers with 66,000 covered employees and total assets of $2.3 billion, says Aon senior partner Rick Jones.

Other major PEP players include payroll providers like Paychex, which has registered more than 25,000 adopting employers and focuses on smaller employer plans, according to Smith.

“There was a large rush of new PEPs in the beginning after passage of the SECURE Act, but then it has slowed down,” Smith says. “That is what we expected. When something new comes out, it’s all in motion, and you have the ‘we gotta jump on the bandwagon and start one’ initial group. Then you’ve got another group that says, like the old [Life] cereal commercial, ‘Hey, let’s get Mikey to try it first…he’ll eat anything.’ And now those guys [who waited] are coming forward.”

Many of the initial entrants did not have the financial strength or capacity to market, develop, and sustain a PEP, Smith adds. “They are falling by the wayside or consolidating, so the weak players are getting weaker and the strong players are definitely getting stronger. We’ve got some of the PPPs that now serve in that role for upwards of 30 and 40 PEPs.”

Hub did not worry about losing market share if it did not rush into the market immediately, Rieck says of the company’s launch of its first PEP in September 2023. “But we were clearly a fast follower,” Rieck says. “I’m glad we waited, because the pooled plan provider business model is still evolving…. Waiting gave us an opportunity to evaluate that market. It also gave the Department of Labor more time to issue…regulations for how to implement PEPs, which they still continue to release.”

HB Retirement set up the HB 3(38) Pooled Employer Plan in early 2022, says Megan Warzinski, managing director at the Henderson Brothers unit. The plan, with Ascensus as PPP, has $20 million in assets, 25 employers, and nearly 1,000 employee participants.

“We routinely hear from smaller employers about the challenges that they have in staffing and the ability to deal with the administrative and compliance complexities associated with the retirement plan,” Warzinski says. “So we saw this as an opportunity to make an impact and provide a solution to employers that may have not been able to offer a retirement plan—that was our primary objective for setting up the PEP. It is now expanding into an opportunity to have conversations with existing customers in our firm about the benefits of offering a PEP.”

Stronger PPPs have raised the bar for establishing new PEPs, says Smith. “If you want to start a PEP, none of the PPPs will talk to you unless you’re doing at least $20 million and truly closer to $50 million [in managed assets] that you can bring in within a relatively short period of time,” he says. “If you’re a small player, having your own PEP doesn’t make any sense. However, smaller players have the option of adding their clients to ‘open’ PEPs that accept adopting employers from any RIA firm or brokerage.”

Pooled employer plan design can vary. Aon’s, for example, is designed for employers with at least 100 employees participating in the 401(k) plan. In addition to being the PPP, Aon is also the 3(16) plan administrator and the 3(38) investment advisor. “Our employers have on average about 800 eligible employees,” Jones says. “So it’s really those midsize companies that have signed on thus far, and we continue to go up market.” Spinoffs of existing companies are another active marketing segment for the Aon PEP, Jones says.

The PEP Value Proposition

Before and immediately after passage of the SECURE Act, PEP proponents touted cost savings, access to more investments, and small employers’ ability to band together as the key value propositions. However, non-cost benefits, such as offloading risk and time-consuming administrative responsibilities, have proven as or more significant, according to those interviewed. Somewhat surprisingly, many larger employers, not just small ones, have demonstrated interest in joining PEPs.

“I think PEPs were created in the first place under SECURE Act with the idea that this would give smaller plans greater buying power,” Shapiro says. “But what we found is there’s actually just as much appetite up market for outsourcing of fiduciary responsibilities as exists for the small plans trying to gain a little bit of buying power.”

“We’ve been talking about this to all of our clients since October, and we have $80 million, $90 million, and $170 million [managed assets] clients that are saying, ‘Yeah, we want to learn more about PEPs,’” Keck says. In addition to handing off fiduciary responsibility for the retirement plans, larger clients also expect more flexibility in design features in plan options offered by the PEP, which allows the large employers to retain their existing plan features when they join the PEP, she adds.

Brokerages interviewed differed somewhat on whether PEP participation would always save employers money. Jones touts Aon PEP’s cost benefits: “Participants are benefitting from a higher performing, more efficient 401(k) program, with employees able to accumulate up to 11% more retirement savings during their career due to lower fees,” Jones notes, citing an Aon savings analysis. “Within the Aon PEP, ‘all-in’ participant fees can be less than half of those paid in traditional 401(k)s [according to the analysis, based on data from BrightScope and current Aon PEP costs]. I’d say we see savings for employers 90 to 95% of the time.”

Others say they are not relying on cost savings as a lead argument for PEPs. “[W]e really don’t view it as a cost play; we have that discussion with the firms when they’re considering it by saying, ‘Hey, if you’re truly trying to build a low-cost option, you could go to an online 401(k) type of scenario and probably get something less expensive as a stand-alone plan,’” Holechek says.

Hub’s Rieck notes that services to single-employer plans, such as from external recordkeepers, have become very efficiently priced, reducing the cost savings gains from pooling. Small employers’ access to a wide range of investment options at competitive prices has also increased, he adds.

Similarly, there is some disagreement among those interviewed over the extent of employers that should belong to a PEP. Aon’s Jones is bullish. “We expect more than half of U.S. employers to merge their traditional 401(k)s into pooled employer plans by 2030,” he says, noting that Australia and New Zealand have “pretty much fully transitioned” to PEP-type offerings and that Europe, the United Kingdom, and Ireland are heading in that direction.

Others interviewed, including Holechek, say PEPs are just one plan design tool among many and may not be the best choice for all employers.

For all sizes of employers, but particularly larger entities, offloading fiduciary risk is often the more compelling argument for joining a PEP, Rieck says. “For those larger employers who are more tuned in to that type of responsibility, there is no other vehicle that is available to them that provides as comprehensive of fiduciary outsourcing as PEPs,” Rieck says.

NFP’s Shapiro agrees and notes that some unsuccessful PPPs had refused to take on sufficient fiduciary responsibilities, such as selection of the 3(38) manager, which proved to be a frequent plan sponsor preference.

Challenges and Conversation Starters

One challenge has been navigating PEP audit rules released by the Department of Labor after the SECURE Act. Particularly unexpected was the universal, annual audit requirement for PEPs with more than 100 participants.

“In my opinion, the main problematic issue is the 100 participant issue. Many people thought it was originally going to be 1,000 participants,” Rieck says. “The cost is the main consideration, but there is the work by the PPP to prepare for the audit as well. A problematic audit can mean a lot of things. If you take it out to the extreme, it means that there are fundamental issues with the PEP that could lead to disqualification.”

Adds Holechek: “One of the pooled plan providers that we work with just terminated two PEPs before the end of last year. Because it was all small employers that are going to be over 100, they are therefore going to be subject to an audit fee.” Fees can run up to $10,000 to $20,000, according to a January 2024 post from the Rosenbaum law firm.

On the other hand, several brokers say the audit rule may actually have encouraged larger employers more likely to be subject to audits to join PEPs. In that case, the PEP plan is audited rather than each employer’s plan, and participating employers essentially split a single audit fee rather than paying the whole fee on their own.

Holechek says that, for any broker with employee benefits clients, PEPs should be raised as a useful conversation starter about a new retirement plan tool, even if they ultimately prove not to be clients’ tools of choice.

“PEPs are not going to be the answer for everyone, but it’s a great conversation starter,” Holechek says. “This relatively new product gives brokers and agents a basis to go talk to potential employers that you don’t currently work with to say, ‘Hey, we’d love to talk to you about this new concept known as a PEP. Here are the players, this is how it works, etc. And after that consultation, if it doesn’t seem like that’s something they’re interested in, they can pivot to, ‘OK, let’s look at your individual 401(k) or 403(b) plan now.’ We also see it as a retention effort for existing clients of the advisors because, if they’re not talking to them about PEPs, we know other competing advisors likely will be.”