What elite RPAs think about PEPs

Pooled employer plans, or PEPs, could dramatically change the 401(k) business, but only if employers decide to adopt them.

Pooled employer plans under the SECURE Act could completely change the defined-contribution industry, or they could have very little impact. They present an incredible opportunity to pool plans to mitigate work and fiduciary liability as well as to lower costs — but the question is whether the market will adopt them

Though record keepers and third-party administrators are most aggressive and will most likely act as the pooled plan providers, retirement plan advisers will still likely drive sales.

What are DC aggregators and elite RPAs planning?

At the 2020 InvestmentNews RPA Convergence Aggregator Roundtable and Think Tank, there were mixed opinions. As John Jurik, Gallagher’s national practice leader for retirement plan consulting, said, “PEPs are opportunities, challenges and threats, all in one.”

[More: View a list of the largest retirement adviser aggregators]

According to forthcoming research by the Defined Contribution Institutional Investment Association’s Retirement Research Council, 55% of elite RPAs were undecided about whether they would offer PEPs to clients and prospects, while 26% indicated that they would. Most said they would use a third party, mostly likely a record keeper, to be the pooled plan provider. Eighty-four percent said they thought PEPs would make sense for plans with less than $5 million in assets, but a significant percentage said that even plans with up to $100 million would be good candidates. (Respondents in the survey could select more than one market.)

By using PEPs, DC plans of such size could limit litigation risk, offload administrative work and be innovative, DCIIA president and CEO Lew Minsky said. Institutional investment consultants like Aon and Mercer have been among the first to offer PEPs as a way to serve smaller plans, which in their world might be those with $100 million or more in assets.

Most attendees at the 2020 Aggregator Think Tank said PEPs would be focused on smaller plans. Fidelity’s offering will target plans with 30 or fewer participants, but others thought PEPs would attract larger plans.

PEPs will also replace multiple employer plans, said John Cunningham, executive vice president at Alliant Insurance Services. PEPs are more of a marketing tool than a way to improve coverage, as smaller employers can already use Simple 401(k) or similar plans, he said. However, about 90% of PEPs will fail, Cunningham said.

Jeff Cullen, managing partner at Strategic Retirement Partners, said, “Most record keepers don’t understand PEPs and are trying to retrofit their current models. Most likely to succeed are those that are innovative.”

PEPs will allow advisers to manage more plan assets, which is especially needed as experienced RPAs are aging.

[Video: Shundrawn Thomas on how silence prevents needed inclusion conversations]

At the 2020 Record Keeper Roundtable and Think Tank, Darren Zino, vice president and head of retirement sales at Transamerica, noted that the company’s pooled programs were one segment that beat expectations in 2020. But he warned that clients, especially larger plans, want to have their cake and eat it too. They want to lock down features that minimize work and fiduciary liability, but they still want customization.

Like broker-dealers, most aggregators and RPAs are waiting to see how the PEP market develops. But many have FOMO, or fear of missing out, and are closely watching the space. If there is ever a federal mandate requiring companies of a certain size to offer payroll-deducted, participant-directed retirement plans, PEPs could explode.

But that could be a double-edged sword. DCIIA’s Minsky warned that companies like Amazon and Square that have strong relationships with smaller employers could leverage low-cost PEPs as a way to access participants. Who could better offer a rich digital experience with the ability to know what the participants are most likely to buy?

Fred Barstein is founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews’ RPA Convergence newsletter.