Outside voices and views for advisers

Pooled employer plans set to dominate small 401(k) market

Under current economic realities and with legislation in place to create PEPs, the retirement market is ready for these plans

Mar 29, 2017 @ 4:41 pm

By Fred Barstein

Market forces are in place for the so-called pooled employer plan (PEP for short) to proliferate, and legislation with bipartisan support is lined up to make them a reality. So what's driving the move to PEPs, a type of open multiple employer plan, and what could it mean to plan sponsors and advisers?

Smaller companies chafe at the cost, complexity and liability of traditional retirement plans governed by the Employee Retirement Income Security Act of 1974, such as 401(k)s.

The automatic-enrollment IRA programs going forward in some states are exempt from ERISA and use simple payroll-deduction IRAs to avoid these issues. But investment choice is limited, as is the ability to match contributions, which are set at a low level. A patchwork of state plans is also troubling for companies with employees in multiple states.

(More: Faltering congressional support for auto-IRAs leaves legislation up to states.)

Entities that share an affiliation, such as members of the American Bar Association or even Coca-Cola bottlers, are currently able to pool assets and resources under a multiple employer plan, a type of defined contribution plan, to increase buying power and outsource almost all work and liability while retaining the ability to customize plan design.

However, under current rules unaffiliated entities must file separate Form 5500s due to the DOL's concern about the "one bad apple rule." That essentially means all plans in the MEP could lose their tax-qualified status if merely one employer messes up.

The Retirement Enhancement and Savings Act, though, a bill that received bipartisan and industry support late last year, would create the aforementioned PEPs, eliminating the one bad apple rule. And separate bills introduced in both the House and Senate in March would also allow aggregated Form 5500 filings if the plans share the same trustee, fiduciary, plan administrator, plan year and investment menu. (The RESA bill didn't move forward last year, but another PEP-creating bill, the Retirement Security for American Workers Act, was introduced in the House of Representatives in early February.)

Small 401(k) plans are sold, not bought, as the federal government learned in the 1990s when auto-IRAs were introduced and almost no companies took advantage. Short of requiring employers to offer a retirement plan at work, which some states are mandating as part of soon-to-be-implemented programs, the market is ready for PEPs.

Here are a few reasons why:

• With more advisers set to be considered an ERISA fiduciary under the new Department of Labor fiduciary rule, more broker-dealers are requiring non-specialist retirement plan advisers to use packaged 401(k) plans with outsourced fiduciaries. Some B-Ds such as Morgan Stanley require advisers, even specialists, to use these packaged products, which operate similar to a PEP, for smaller plans.

• Most elite plan advisers and many specialists are economically unable to work with smaller plans. But by pooling assets in PEPs using the same investment menu, the market would become more attractive, especially as margins are being squeezed with larger plans.

• With a heightened focus on fees, fiduciary responsibility and litigation, PEPs offer smaller and even some mid-sized employers an attractive alternative, especially those forced by the state auto-IRA programs to offer some sort of workplace retirement plan.

The 401(k) plan moves slowly, as does Congress. Legislation will be required, but market demand by smaller employers, fueled by advisers looking to take advantage of the growing demand, could force changes and lead high-cost retirement plans to adopt more attractive and affordable PEPs. Even larger plans could take the plunge, as well as employers who do not offer their employees a retirement plan at work.

Fred Barstein is the founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews' Retirement Plan Adviser newsletter.


What do you think?

View comments

Recommended for you

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Upcoming Event

Apr 30


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

Gadget Girl

Orion's Clarke: Why integration is paramount for RIAs right now

Orion has tapped into a huge demand for customizable, integrated solutions that let advisers spend more time building their business. Hear from Eric Clarke and two of Orion's integrated partners to get their thoughts.

Latest news & opinion

Raymond James executives call on industry to keep broker protocol

Also ask firms to pay for the administration of the protocol to 'ensure its longevity and relevance.'

Senate committee approves tax plan but full passage not assured

Several Republican senators expressed reservations about the bill, and the GOP cannot afford too many defections.

House passes tax bill, focus turns to Senate

Tax reform legislation expected to have more of a challenge in upper chamber.

SEC enforcement of advisers drops in Trump era

The agency pursued 82 cases against advisers and firms in fiscal year 2017, down from 98 the previous year.

PIABA accuses Finra of conflicts of interest

Public Investors Arbitration Bar Association report slams self-regulator over its picks for board of governors.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print