The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in December 2019, introduced an entirely new retirement plan fiduciary structure called the Pooled Employer Plan (PEP). PEPs will allow unrelated employers to pool resources to help achieve economies of scale and administrative efficiencies. As PEPs gear up to go live Jan. 1, 2021, employers have an opportunity to reevaluate their retirement plan strategy to determine if PEPs are a fit. As with any retirement plan strategy, PEPs come with benefits, limitations and risks that should all factor into an employer’s decision to join.
Employers in need
The concept of employers joining other employers to form a single, pooled retirement plan has been around for years. The strategy was to gain economies of scale and better leverage for negotiating pricing, services and access to a broader investment universe. Pooling was most common with employers who had varying levels of common ownership or business dealings, and those in associations, common industries and professional employer organizations. Generally, those arrangements still required participating employers to retain responsibility for their operational, investment and fiduciary obligations. As a result, widespread adoption never materialized.
Recognizing the particular challenges small employers had with not only pricing, but with having the necessary knowledge and resources to run a retirement plan properly, legislators put forward several proposals over the last few years expanding on the pooled concept. Fast forward to Dec. 20, 2019, when Congress passed and the President signed into law the SECURE Act, the most expansive retirement reform bill in the last 14 years. The SECURE Act provided the foundation of an entirely new plan, the PEP.
PEP structure
In most retirement plans, the employer typically holds the plan sponsor role, which carries with it all administrative, fiduciary and investment duties. In a PEP, the plan sponsor role is outsourced to a professional third party known as the Pooled Plan Provider (PPP). Because the PPP is the plan sponsor, the PPP is also the designated plan administrator and named fiduciary, two very important legal roles in determining who has fiduciary responsibility for the plan.
The PPP could be almost anyone, but regulators intended the role to be filled by someone with a great deal of expertise and resources and the ability to manage the needs of all participating employers. As a result, the PPP role is likely to be filled by third-party administrators (TPAs), recordkeepers, registered investment advisors (RIAs) or some other financial services firm. The PPP must acknowledge their fiduciary responsibilities in writing and ensure all participating employers are complying with their obligations and that the plan is properly bonded. All of these requirements are further monitored by registration requirements with the U.S. Department of Labor (DOL).
While there certainly may be many variations on PEP design and structure, the general strategy removes as much of the fiduciary and administrative burden from the employer as possible. As a result, the most common PPP approach will fully outsource the fiduciary role of the named plan administrator (pursuant to ERISA Sect. 3(16)) to a TPA and the fiduciary discretion over the PEP’s investments to an RIA (pursuant to ERISA Sect. 3(38)). In addition, the PPP will be responsible for the standard roles of recordkeeper and custodian.
Each employer in the PEP will effectively be the plan sponsor with respect to their own plan assets and participants. Depending on how an employer contracts to enter the plan, they may hire the PPP only, who in turn hires the other fiduciary service providers, or the employer may hire each provider independently. This initial contract will determine the extent to which the employer retains the fiduciary obligation to select and monitor just the PPP or the PEP’s other service providers as well. The employer will always have the very important obligation to timely fund the PEP with employee and employer contributions as well as to provide all the proper participant data timely to the PPP and the other service providers.
The benefits of a PEP
Compared to a traditional employer sponsored retirement plan, the PEP’s outsourcing benefits become very apparent. It should also be noted, that outsourced administration and investment decision making models are not a new concept. However what makes the PEP different is that for the first time, the legal obligations of the Plan Sponsor can now be shifted to a professional, adding a significant layer of fiduciary protection not previously available. Under a properly built PEP, the employer can, in most cases, remove themselves from:
Investment selection and monitoring
Annual report Form 5500 filings
Annual plan audit
Plan document/restatement
Participant notices
Annual testing
Hardship distributions
Participant loans
Distributions and rollovers
In addition to the outsourcing benefits, PEPs may provide cost savings. Generally the retirement plan industry offers better pricing to plans with greater assets. Pooling assets immediately creates scale and thus access to better pricing for plan services. This also applies to investments. Larger plans generally have access to a wider range of institutionally priced investment products. With some exceptions, PEPs will be subject to annual audit requirements, and while the cost of a PEP audit will certainly be more than a single employer plan, it will be spread across all employers within the PEP, likely making the individual employer’s portion less. For smaller employers, the SECURE Act also provided up to $5,000 in startup tax credits, with an additional three-year $500 tax credit if the plans adopt automatic enrollment.
While PEPs were originally considered beneficial to small employers, employers of all sizes are considering the benefits of outsourcing their obligations and liability. Faced with increasing regulatory and compliance complexity, litigation risk, human capital management challenges, overall benefit program costs, and COVID-19, these employers find the idea of removing retirement plan pain points by joining a PEP appealing.
The considerations of a PEP
PEPs will not be a fit for all employers, nor do they come without limitations. Single-employer plans generally allow for an almost limitless decision tree of design and investment options, but to achieve efficient pricing, many PEPs will likely place limits. For example, an employer today with complex nondiscrimination testing needs may find that a PEP cannot accommodate this, while PEPs built for larger employers may be able to. Employers who transition into a PEP will also need to pay careful attention to protected benefits to determine if a PEP can accommodate their existing employees’ rights. In addition, employers who enjoy a great deal of investment menu flexibility and the ability to make their own investment decisions may also find that a PEP cannot meet their needs. Many PEPs may use proprietary investment products of their recordkeeper such as target date funds or stable value funds. Depending on how proprietary products are selected, the PEP may have to navigate ERISA’s prohibited transaction rules in addition to evaluating performance and cost. Employers should consider their current plan design and investment needs to determine whether a PEP can accommodate them joining. The widespread variance of employers’ needs is also why we will likely see many different types of PEPs being offered with different options and costs. If one PEP does not fit, another may.
Regardless of how much outsourcing is achieved, accurate participant data forms the foundation for plan compliance. Data submission will always be the employer’s obligation. This includes hire dates, hours, compensation, deferral elections, termination dates and loan payments. For the PPP and plan administrator to properly run the plan, this data must be supplied by the employer from their payroll and HR systems, which will require integration. If compliance failures result from inaccurate data feeds, the PEP contracts may shift the fiduciary burden back to the employer. These issues will also apply to the employer’s requirement to fund plan contributions timely.
It cannot be emphasized enough that no retirement plan strategy completely removes all the employer’s fiduciary responsibility, including PEPs. While an employer may delegate responsibility to a PPP, the responsibility to ensure that the delegation is being carried out and that fees are necessary and reasonable for the services provided remains. Employers looking to join a PEP should pay careful attention to how the PEP’s contract terms place fiduciary responsibility on the various parties, including the employer.
Unanswered questions
The SECURE Act laid a solid foundation upon which to build PEPs, but there remains a great need for regulatory guidance. Most important will be the need for the DOL to address potential conflicts of interest when a service provider takes on the PPP role and then hires themselves to take on other roles in the plan for compensation. This scenario is very likely to occur in many PEPs where a recordkeeper serves as a PPP and hires themselves as the plan administrator or an RIA serves as the PPP and hires themselves as the discretionary investment manager. Conflicts could also arise if the PPP includes proprietary investment products in the PEP.
These scenarios could seemingly be addressed with guidance on reasonable arrangements and proper disclosures, but that exemption doesn’t currently exist. Compound these issues with a litany of operational questions ranging from how employees who move from one PEP employer to another are treated administratively, to how a protected benefit would be treated, to how a noncompliant employer would be removed from the PEP, and you have a lot of guidance needed prior to Jan. 1, 2021.
Next steps
PEPs present an opportunity for employers who struggle with their plan sponsor obligations and are looking for better value for their employees. Employers with consistent compliance failures, a lack of retirement expertise, limited HR resources, and a fear of the regulatory and litigation risk could be great fits for a PEP. However, not all employers are, and not all PEPs will be structured to deliver all of an employer’s needs. Employers must carefully read and understand the PEP agreement’s terms and conditions and evaluate the overall offering and cost compared to their current plans. Employers will need to approach PEPs much as they do other retirement plan considerations: Identify the challenges their plan currently presents and determine if a PEP can meet them.
If you’re contemplating a PEP, consider:
How much fiduciary responsibility you are willing to take.
Your goal for the retirement plan. Is it low cost, low touch or something that is highly customizable to meet all employees’ needs?
Are you comfortable delegating administration and willing to abide by others’ direction?
Is having someone else take control over your investment options acceptable?
Are you willing to potentially pay a premium for nonPEP services?
These questions will help employers have an honest conversation about how their retirement plan fits in their overall benefits and business strategy. If you have questions or wish to talk more, please contact your Lockton Retirement Services team.
Investment advisory services offered through Lockton Investment Advisors, LLC, a SEC registered investment advisor.
Nothing in this message should be construed as legal advice. Lockton may not be considered your legal counsel and communications with Lockton’s compliance services group are not privileged under the attorney-client privilege.
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