A pooled employer plan with personalized TDFs is landing soon

Two powerhouses in the 401(k) business – American Funds and Ascensus – are adding a new pooled employer plan to the market that the companies say gives a better option than basic target-date funds.

The Ascensus American Funds PEP is the first such plan to include the fund company’s Target Date Plus investment option. That target-date series has a personalized asset allocation component provided by Morningstar Investment Management, which means that the product can account for more than age alone, the firms stated in an announcement this week.

The new plan adds to record keeper Ascensus’ growing PEPs business, which now represents $1.2 billion across 28,000 accounts, still a small proportion of its total $723 billion in assets under administration, according to the company. American Funds and Ascensus announced the forthcoming plan last fall, initially planning on a spring 2024 launch.

Since PEPs appeared on the scene in 2021, about 500 of them have launched – but American Funds appears to be bringing something new in the form of personalized target-dates, which gives the company’s PEP an advantage, said Fred Barstein, founder of The Retirement Advisor University.

“Anything American Funds does – they have so much clout, and their target-date funds in particular have done really well,” he said.

The company’s American Funds Target Date Retirement suite has been the top-selling mutual fund series in the category for two years in a row, with retirement savers pouring a net of $21.2 billion into them, representing about two-thirds of all U.S. target-date mutual fund flows, according to a recent report from Morningstar. That’s no small feat for an active manager, as the target-date space is otherwise dominated by index-fund-based products.

Another fund company, Pimco, offers a personalized target-date suite as well. Given the dearth of customizable investment options within PEPs, though, there could be significant demand for what American Funds is pitching, Barstein said.

“There is a wide gap between the target date, which only uses age, and a managed account, which has 19 factors. But you need to get [participant] engagement to get the additional data, or have access to it,” he said. By contrast, the personalized target-date setup means that “you don’t need that much data, and the costs, I think are reasonable. Managed account costs are a little bit out of whack right now.”

The plan, which is available to employers and advisors, includes a range of investment tiers. The actively managed target-date series can be the qualified default investment option, or the product that plan participants get if they don’t opt for something else.

Aside from that, the PEP’s “plan design [has] flexibility for each adopting employer,” with an “open architecture fund lineup inclusive of American Funds, BlackRock, T. Rowe Price, Principal, and other leading investment managers,” the firms stated.

The PEP’s investment menu was designed by fiduciary service provider Wilshire, and the plan includes an administrative fiduciary component, known as 3(16) fiduciary service, which can “mitigate fiduciary exposure” for employers.

Additionally, the plan includes the option of financial wellness services from Financial Finesse.

The PEP structure, which was enabled by the Secure Act, has benefited from a few different trends. Small businesses increasingly have been pressured to offer retirement plans for their workers – not just because doing so makes them competitive, but because states have begun requiring them to either provide their own plans or enroll workers in automatic IRAs. Beyond that, though, larger employers in some cases have sought to simplify their retirement plans, and the all-in-one packaging of a PEP can be a good alternative to a traditional single-employer 401(k).

“PEPs are a really big deal, and I do think they are going to take off,” Barstein said. “It was supposed to be for the small, micro market – and it still is – but it’s also being adopted by the mid and larger plans for a good reason.”