In the run-up to the passage of the SECURE Act, many industry leaders predicted that pooled employer plans would have as big an impact on the retirement plan market as the 2006 Pension Protection Act, which expanded the use of automatic features.
But some were skeptical. Mark Iwry, former senior adviser to the secretary of Treasury during the Obama administration, once asked me what advantages PEPs would offer, other than joint 5500 filings and audits.
My answer was that they were a more elegant solution for 3(38) and 3(16) fiduciaries and provided a way to pool assets and get access to institutional-grade investments.
But as we wait for the defined-contribution market to adopt PEPs, the results so far have been muted. A few vendors have applied to be pooled plan providers, but not in the numbers many predicted.
Hub International announced a small market service in March, starting with Empower Retirement and expanding eventually to five record keepers, rather than a PEP.
“We were 80% through the process of creating our small-market solution when PEP legislation passed,” said Jim O’Shaughnessy, president of retirement and wealth at Sheridan Road, a division of Hub International. “We will ultimately offer a PEP — maybe a few of them based on company size — but we are currently waiting for clarification” from the Department of Labor.
The case for PEPs is compelling, especially to deal with the fact that there are 5 million to 6 million companies in the U.S. and just 650,000 DC plans.
“PEPs address a new market,” said Kelly Michel, an industry consultant on multiple employer plans and PEPs. “There are different value propositions than what current providers offer.”
Though PEPs might ultimately be used by larger plans, the government intended them as a solution for the 60 million workers who don’t have access to retirement plans at work. But startups and micro plans have different needs and dynamics that aren’t served by most retirement plan advisers or providers. These smaller entities will turn to their benefits brokers, wealth managers or even CPAs for help.
“Existing providers will not like PEPs, nor will RPAs who built their service model on design and consulting,” Michel said. The same can be said for third-party advisers unless they decide to be a pooled plan provider.
Smart Pension, arguably the largest PEP provider in the world, with 80,000 plans in the U.K. and $2.8 billion, just raised an additional $228 million, with much of it going to their U.S. startup.
“PEPs offer economies of scale and ease of solution for small plan sponsors,” said the company’s U.S. CEO Jodan Ledford. “Retirement income issues are more likely to be solved in a pooled environment, which also provides democratization of assets classes.”
Along with ease of use, many think PEPs offer greater fiduciary protection and lower cost. But many believe that 3(16) services inherent in PEPs could actually increase costs, which could force the PPP to either make money on proprietary investments or worse, hide or shift the fees.
Traditional record keepers like Ascensus suggest PEPs are inflexible, locking a plan sponsor into a solution that may not meet their individual needs.
“Plans are sold, not bought,” said J.D. Carlson, owner of Plan Design Consultants and famous for the Retireholics program. “Advisers are the distribution engine of DC plans. Will they want to sell PEPs en masse?”
The dudes at Retireholics noted that third-party administrators already offer customized solutions to small and startup plans at a relatively low cost. “PEPs are harder to explain.”
Will PEPs take off because of tax incentives and credits or because of state, local and even federal mandates? The incentives have been available for decades in one form or another, yet 50% of companies still do not offer retirement plans at work. So maybe mandates are needed.
The question is whether PEPs will be the vehicle.
PEPs may offer companies like State Farm a way to provide insurance clients with retirement plans. But more likely, benefits and property-and-casualty brokers like Hub, NFP, OneDigital, MMA, Gallagher and Lockton will partner with their RPAs.
“Hub benefit and property-and-casualty clients tend to be smaller,” O’Shaughnessy said. “In 18 months, I could see them gaining traction for those clients with PEPs designed just for restaurants or construction companies.”
While it’s too early to know whether PEPs will take off, current advisers and providers that don’t adapt will likely resist, delaying their implementation, just as many traditional money managers first resisted target-date funds — until they didn’t and missed out.
Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.