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In this fifth episode of our Ropes & Gray podcast series addressing emerging issues for fiduciaries of 401(k) and 403(b) plans to consider as part of their litigation risk management strategy, David Kirchner and Jack Eckart, both from our benefits consulting group, discuss pooled employer plans (or PEPs). PEPs allow employers to join a group retirement plan that is administered by third-party service providers who will assume the majority of the administrative and investment fiduciary responsibilities (and risks) of managing a defined contribution retirement plan. While the marketplace is just beginning to take shape, PEPs may potentially be an attractive option for small and larger employers, as well as private equity sponsors that oversee plans of multiple companies across their portfolio.
David Kirchner: Hello, and thank you for joining us today for our latest Ropes & Gray podcast during which we will be continuing our series on emerging issues in the 401(k) litigation risk assessment and management space. I’m David Kirchner, a principal in the benefits consulting group based in Boston, and I am joined by my colleague, Jack Eckart, a benefits consultant who is based in New York. In past episodes in this series, we have discussed a variety of hot topics such as retirement plan cybersecurity and the DOL’s regulatory initiatives concerning ESG investments. In this episode, we’re going to talk about one of the newest innovations in the retirement plan space—pooled employer plans, also known as PEPs.
PEPs are essentially an alternate to a single employer defined contribution retirement plan like a 401(k) or 401(a). Created by the SECURE Act legislation at the end of 2019, PEPs were established as a new and alternative product on January 1st of this year, and PEPs allow plan sponsors to pool their participants and assets with other plan sponsors and delegate most all of their fiduciary responsibilities to these third parties.
PEPs provide economies of scale that may result in lower administrative costs, increased efficiencies and are aimed to expand retirement plan access to the American workforce—particularly smaller employers. Beyond costs and increased access, PEPs may be appealing for employers from a litigation risk management standpoint, as they allow for the outsourcing of fiduciary responsibilities to third parties, namely, the pooled plan provider. Furthermore, for private equity sponsors, PEPs can offer a quick and easy solution for portfolio companies, especially in the carve-out context where we need to get employees of the spun-off company enrolled in a plan in short order. But before we go further—Jack, I know you’ve spent a considerable amount of time learning and working with some of the larger PEPs that have sprung up in this new marketplace—can you describe the PEP structure to our listeners and in particular, explain the roles and functions of the various third parties who are providing services under the PEP?
Jack Eckart: Of course, and thanks, David. I’m happy to be here with you on this podcast. There are essentially five key parties or functions in every pooled employer plan. The first is the employer, which is more or less comparable to the plan sponsor under a single employer plan structure. However, since the employer is delegating their plan sponsor fiduciary responsibilities to third parties under the PEP, you’ll see them commonly referred to as the employer under a PEP.
In addition to the employer, you have all of the third-party actors that make the PEP structure, which include:
- the pooled plan provider,
- a 3(38) investment fiduciary,
- the recordkeeper, and
- the trustee.
As I think most of our listeners know, under a single employer retirement plan, a trustee holds the plan assets, and a recordkeeper is responsible for the administration of the retirement plan. Their responsibilities are primarily the same under a PEP.
In the traditional single employer 401(k) environment, we’re familiar with both 3(21) and 3(38) investment fiduciaries. However, 3(21) investment fiduciaries are much more common among our clients. A 3(21) investment advisor reviews and recommends the investments under the retirement plan, but the ultimate discretion to add or remove an investment remains with the plan sponsor—the plan sponsor retains the investment fiduciary responsibility.
A PEP, however, only uses a 3(38) investment fiduciary. A 3(38) investment fiduciary has the discretion, control, and authority to determine and make changes to the PEP’s fund line-up without the approval from the employer.
As for the pooled plan provider, this role is distinct to the PEP framework. The pooled plan provider assumes the 3(16) administrative fiduciary responsibilities that would ordinarily be assumed by the employer or plan sponsor offering a single employer defined contribution plan. The pooled plan provider becomes responsible for managing plan documents and SPDs, distributing required notices like SARs and fund disclosures, filing 5500s and engaging plan auditors, approving withdrawals and loans, and approving plan compliance testing.
David Kirchner: So Jack, it seems like if the employer opts into a pooled employer plan, it basically outsources most, if not all, of its responsibilities. So, if they have outsourced the administrative and investment fiduciary responsibilities, what could possibly be left?
Jack Eckart: Yes, the pooled plan provider takes on the vast majority of the employer’s traditional roles and responsibilities. However, the employer still holds a very important fiduciary responsibility, and that’s determining whether a pooled employer plan is the right solution for its employees as compared to a single employer plan, and if so, which PEP is the best choice for its participants. Furthermore, the employer or plan sponsor needs to continually monitor and benchmark the PEP it has selected as circumstances change and the retirement plan marketplace evolves.
David Kirchner: Thanks for providing the new lay of the land, Jack. So, based on what you said, employers can’t simply wash their hands of all fiduciary responsibilities by selecting a PEP, can they?
Jack Eckart: Correct. A pooled employer plan isn’t this magical set-it-and-forget-it solution for employers. The employer will still need to continually monitor the PEP just like any other employee benefit plan it offers, and it must continue to regularly benchmark the fees and services of the PEP through the RFP process.
Additionally, the employers will continue to be responsible for selecting the plan provisions, providing census data and eligibility files, and remitting payroll contributions and loan repayments on a timely basis.
Something unique to PEPs is that they are currently a bundled offering. By that, I mean a pooled employer plan will be made up of predetermined vendors for each component—one pooled plan provider, one 3(38) investment fiduciary, one recordkeeper, and one trustee. An employer cannot select the underlying service providers within a PEP’s structure, like a different trustee or recordkeeper. This is very different from the traditional single employer 401(k) landscape, where plan sponsors independently evaluate and select recordkeepers, investment advisors, plan auditors, and the rest of the service providers. Therefore, an employer will want to be very diligent in vetting all the service providers within a PEP before moving forward and enrolling in that PEP.
David Kirchner: Got it. So if an employer has a very comprehensive evaluation process for a pooled employer plan, and it is monitoring all of the service providers the PEP uses, while not fool-proof, it seems as though the employer should be able to substantially mitigate their potential exposure to ERISA litigation on account of alleged fiduciary breaches.
So shifting gears now, I know you’ve spent a lot of time reviewing and evaluating the various PEPs that have arrived on the marketplace—can you talk about some of the differences you have seen from the various PEPs offerings that are currently on the market?
Jack Eckart: Sure, David. From the outset, I should remind listeners that since PEPs are brand new, the landscape is just starting to take shape. That said, we’ve been keeping our pulse on the various PEP offerings that have emerged in 2021, and it seems there are some notable differences.
Foremost, there are many different types of companies and organizations offering pooled employer plans and taking on the role of the pooled plan provider. Some of the traditional retirement plan recordkeepers like Fidelity and Principal have registered with the DOL as pooled plan providers, as have benefits consulting firms like Aon and Mercer, payroll providers like Paychex, and various professional employer organizations (or PEOs) and benefit plan administrators. As I mentioned, each pooled plan provider must be registered with the DOL, and anyone can access a list of the registered entities on the DOL’s website (you can find a link in the transcript of this episode, posted on the Ropes & Gray homepage).
Furthermore, each pooled plan provider can choose how to incorporate the various functional players within their PEP offering. I am referring to the 3(38) investment fiduciary, recordkeeper, and trustee providers that I previously described. Some of the pooled plan providers offer their own proprietary suite of investment fiduciary services, and they are also capable of holding plan assets and performing the function of the trustee. In other words, these pooled plan providers have the ability to fulfill each of the different roles for a PEP.
When evaluating these one-stop-shopping PEPs, the employer must carefully consider whether it’s in the best interest of their participants to have one entity acting in all functionary capacities of the PEP. Will the structure provide the best operational checks and balances for the participants enrolled in the PEP? As a result, employers may find that some pooled plan providers that have the ability to fulfill all of these different roles choose not to do so, as they believe the best structure for their PEP is to have different best-in-class vendors serving in each independent function.
As for the consulting firms, benefits administrators, and PEOs that are registered as pooled plan providers, they have typically partnered with other entities to provide the services to their PEP that they do not typically offer. Like I mentioned before, if an employer chooses to consider a PEP, they will need to evaluate the structure of the PEP and all of the service providers within the PEP.
David Kirchner: Okay, so do you have a sense of what the target customer looks like for these pooled service providers?
Jack Eckart: Yes, good question. It seems that certain pooled employer plans are being pitched to different segments of the market. Some PEPs are geared towards smaller companies or start-ups, while other PEPs are targeting employers that have already-established defined contribution plans like a 401(k) or a 401(a) that may be interested in transferring their assets and participants to a PEP.
To give a little more color to this point, there are PEPs on the market that are intended for employers that don’t have an existing retirement plan. It seems these PEPs are really targeting smaller companies that may not have the internal capacity and resources to manage a traditional single employer plan. Due to economies of scale created by pooling plan assets and services together with other employers, it is possible that the pricing of joining a PEP is far more competitive than sponsoring a traditional defined contribution plan for these smaller employers. The majority of PEPs that are targeting smaller employers only offer a limited number of relatively simple plan provision options.
In comparison, some PEPs are more focused on attracting larger employers with established defined contribution plans that would be transferring the assets and participants into the PEP on day one. In this scenario, the pooled plan provider may offer pricing on a sliding scale―the more assets the employer transfers on day one, the more favorable the pricing will be. These PEPs also seem to accommodate more plan provisions.
To be clear, these are the two ends of the spectrum, and the pooled employer plan market is brand new and will most certainly continue to evolve. There are other options in the middle that can accommodate a wide-range of employers considering a PEP.
David Kirchner: Okay, Jack, so it seems that there’s potentially a pooled employer plan that may be suitable for many existing defined contribution plans. Would it be fair to say that the plan sponsors may want to consider a PEP next time they issue an RFP or do benchmarking for their retirement plans?
Jack Eckart: Right, so at the end of the day, the plan sponsor is responsible to act in the best interest of the plan participants, so our clients may want to look at a few PEP offerings the next time they issue an RFP or benchmark recordkeeping services. Look, if a PEP isn’t suitable because of fees, or a PEP can’t accommodate certain plan provisions, the plan sponsor can at least demonstrate that they considered a PEP as an option. Of course, the vetting process should be well documented.
David Kirchner: Yes, as we have said on several of these podcasts, documenting your selection process is very important in ensuring that plan sponsors have conducted a thorough, prudent analysis when considering retirement plan service providers. As we’ve seen in some of the 401(k) litigation space, this evaluation process would most likely be scrutinized by a court in the event of the employer has to defend itself in an ERISA fiduciary breach lawsuit.
So Jack, in light of everything we have discussed today, do you think PEPs are here to stay and will grow in popularity?
Jack Eckart: Yes, I think so. As more and more retirement plan lawsuits are filed, we believe plan sponsors will look for alternatives to try and offload as much of their fiduciary responsibilities as they can. Additionally, PEPs potentially can decrease internal administrative burdens and offer smaller employers with limited resources a chance to offer their workforce a retirement benefit.
We also believe that PEPs may grow in popularity in the realm of private equity and corporate transactions. In this context, it always seems there are condensed timelines to set up benefit plans and get employees enrolled. In this context, PEPs could potentially offer a streamlined process that can be implemented relatively quickly. Additionally, without the requirement for employers to share a common industry or geographic location, as traditionally required by multiple employer plans, a PEP may be a viable solution for a PE firm rather than having to manage multiple single employer plans across its portfolio of companies. Also, when a PE firm goes to sell a company, we believe there would be limited compliance issues with a PEP.
David Kirchner: I guess we’ll have to wait and see how the emergence of pooled employer plans all plays out. Jack, if a company is interested in exploring PEPs, what can they do?
Jack Eckart: Well, they certainly could reach out to you or me. We’ve been in regular contact with the PEP providers and are even in the process of implementing one. Based on our conversations with the PEP providers, I think we could assist in streamlining which PEPs could actually be suitable for a company based on their current situation and retirement plan design.
David Kirchner: Yes, we could certainly assist with an RFP process or discuss the differences, in depth, of the various PEP offerings we’ve explored.
Thank you so much for joining me today and sharing some valuable insights in this rapidly-developing area. For more information on PEPs or other aspects of 401(k) litigation risk assessment and management, you can also visit our website at www.ropesgray.com. You can also subscribe and listen to this series wherever you regularly listen to podcasts, including Apple, Google and Spotify. Thanks again for listening, and take care.