Fidelity launched a PEP — here’s why that matters

The company was far from being the first to register with the Department of Labor as a pooled plan provider. But its fully bundled service, which includes administration, fiduciary oversight and the plan’s investments, indicates that Fidelity is confident that it will not run afoul of the regulator.

Fidelity’s recently announced venture into the pooled employer plan market gives the financial juggernaut a clear way to build relationships with small businesses, and it’s a sign to naysayers that PEPs could be here to stay.

The Boston-based company expects to start bringing clients onto its full-service PEP, Fidelity Advantage 401(k), in February, with the first money going into the plan in April.

The company was far from the first to register with the Department of Labor as a pooled plan provider. But its fully bundled service, which includes administration, fiduciary oversight and the plan’s investments, indicates that Fidelity is confident that it will not run afoul of the regulator by providing both products and services to the plan.

That has been a mental hurdle for numerous companies that have registered as pooled plan providers but have no immediate plans to launch a PEP. Some, including Vestwell, have indicated that they’re “waiting to see how the market unfolds,” as the DOL has not given guidance on avoiding prohibited transactions for those seeking to provide multiple services.

“The Fidelity Advantage 401(k) is structured such that Fidelity, in its role as PPP and investment fiduciary, does not receive any conflicted compensation that would require us to use a [prohibited transaction exemption],” the company said in a statement.

Fidelity has also taken the stance that PEPs present an opportunity to expand the retirement plan market. Industrywide, there has been debate about whether PEPs will be a hit with smaller businesses that have never offered a retirement plan or whether they will see more interest from larger employers that already have plans but want to mitigate their fiduciary liability.

“PEPs have the ability to serve clients of a variety of different sizes, but we’ve made a choice in our initial phase to target micromarket, five-to-50 [employee] startup plans only,” said Andy Schreiner, senior vice president of DC innovation at Fidelity, who leads the company’s PEPs team. “This is an area where we felt we needed to test market demand.”

In its initial phase, the Fidelity PEP will work with 10 to 15 employers, Schreiner said. The plan gives employers no choices to make — everything from the cost to the lineup of Fidelity investments and the 4% matching contributions are preset.

“The overall plan design was to limit choice for the employee and employer to make it a super-simple process,” Schreiner said.

The company has done some digital marketing for the PEP, including through a new landing page, he said.

The expansion of the availability of workplace savings plans is in line what legislators had in mind in drafting the SECURE Act, which paved the way for PEPs.

Fidelity’s move hints that the PEP design “is actually going to make an impact where it was intended to — in that microplan space,” said Kelly Michel, principal at KME Retirement Consulting. “It totally legitimizes the plan design.”

That a company with Fidelity’s resources is comfortable offering a PEP in which it provides multiple services will likely be welcome news to competitors sitting on the sidelines.

“It is a very bold move that they’ve made. The devil could be in the details in terms of how they structure their contracts to justify the myriad of roles they’re taking on,” Michel said. “The spirit of the SECURE Act, and certainly [Rep.] Richie Neal’s direction, has been quite clear in that there is no prohibited transaction exemption for being one’s own provider.”

There could be a need for an independent fiduciary in this nascent market, she said.

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There is also the lingering question of how a plan provider, acting in a fiduciary capacity, could fire itself, said Robb Smith, an ERISA fiduciary consultant who recently launched the site PEP-RFP.com.

“That’s a big question, and I think there’s a good reason to hold off,” Smith said. “But there are also a lot of players who have been in the multiple employer plan business … who are confident they can handle those questions.”

A company with Fidelity’s resources also presumably has the benefit of being able to pivot quickly in response to DOL guidance, Smith noted. “They can make it work because of their size.”

But there are dozens of entities that have registered as pooled plan providers so far, and there could be hundreds in the future, he said. In time, some of them, especially the smaller providers, will end up consolidating, he said.

In the meantime, “with all the options that are going to be out there, it’s going to be mind-boggling for the employers and adviser groups” searching for a plan provider, Smith said.

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