2021: The year of the PEP

As the pandemic enters its third year and everyday life takes on some semblance of normalcy, the InvestmentNews team looks back at the most interesting industry developments of 2021.

This year might be remembered as a turning point for the small retirement saver.

January marked the beginning of pooled employer plans, a type of group 401(k) that lets unrelated businesses participate together, potentially with economies of scale they would not have on their own.

It’s effectively a new market for the retirement plan industry -- one that plan providers up until recently had disregarded, as thin margins discouraged them from catering to small businesses. But it’s also an incredibly big frontier -- small businesses employ just under half of all U.S. workers, but they are much less likely to have retirement plans than bigger companies.

It’s hard to know how much this nascent business has grown in less than 12 months, but dozens of providers have shown their intentions of participating. Since the Department of Labor began allowing companies to register as pooled plan providers, more than 60 entities have filed with the regulator. Most have yet to move forward with pooled employer plans, but several made notable entrances into the market.

The most notable, arguably, is among the biggest names in the financial services industry: Fidelity Investments. That firm’s PEP, which includes the company’s investments in its lineup, is aimed at new business from small businesses and startups.

With so many companies preparing these plans, features that distinguish one from another are becoming clear.

Morningstar, for example, is launching a PEP with Plan Administrators Inc. that will feature investment options with environmental, social and governance criteria. And another plan, from National Professional Planning Group, Lincoln Financial and Morningstar Investment Management, will include a guaranteed income option.

Last week, Qualified Plan Advisors and Newport Group announced a PEP that features adviser-managed accounts as part of its default investment option.

Another provider, Paychex, has been signing up thousands of small businesses for its PEP, according to the company. More than half of the company’s new retirement plan clients have opted for it since the PEP’s launch, the firm has said.

Much of that growth has reportedly been in states with automatic IRA programs, which require employers to provide some type of retirement plan coverage if they don’t want to sign their workers up for the public option.

The growth of state auto-IRAs itself has also been big news for small businesses this year.

In California, for example, all employers with 50 or more workers were required in June to sign up for the CalSavers auto-IRA, unless they already provided retirement plans. As of the end of November, there were about 210,000 funded accounts in the system, according to data from the state.

The next deadline for that state program is June 30, 2022, when businesses with five or more workers will have to register.

Oregon and Illinois also have auto-IRA programs that have been up and running for years. Connecticut’s program recently went live, and there are seven other systems being built: in Colorado, Maine, Maryland, New Jersey, New York, Virginia and Seattle.

To read the rest of this series:

• Biden’s tough tax talk fuels record M&A activity
• ETFs take center stage in 2021
• Gensler sets fast pace, expansive policies at SEC with Democrats in control
• What a year for broker-dealers and their advisers
• The battle for direct indexing heats up