Where MEPs and PEPs can fall short

It’s only been a few years since pooled employer plans, or PEPs, became available as an alternative to single-employer 401(k)s, but a new report from the Center for Retirement Research casts an uncertain future for them.

The plan type, a kind of multiple employer plan made possible by the Secure Act, lets numerous unrelated businesses participate and is overseen by a third party. PEPs have been touted as a lower-cost alternative to small employer 401(k) plans, and they take most of the fiduciary liability off a business owner’s plate.

But in a paper last week from CRR’s Anqi Chen and Alicia Munnell, the authors found that PEPs don’t necessarily offer lower costs and that employers might be unfamiliar with the plan type, which stands to hamper uptake. Further, they noted that getting out of a PEP and moving to a different plan could be complicated and that participating in one poses a small challenge for mergers and acquisitions.

While just 13 percent of small-business owners said they’re unfamiliar with 401(k) plans, a much higher percentage, 79 percent, said the same about MEPs and PEPs, according to the report. Further, PEPs face competition from the growing number of state-run auto IRA programs, many of which require employers to provide plans or participate in the state option. But state programs have also been seen as a tailwind for PEPs and other private-sector plans, as they provide an option for employers who want something beyond what the state offers.

“The main advantages of PEPs relative to auto IRAs is that they are available in every state, 401(k)s have higher annual contribution levels than IRAs, and employers are allowed to contribute,” the authors wrote. “In short, employers might find PEPs more attractive than existing options because they limit fiduciary responsibility, while maintaining the ability to select the provider of choice and offer employer matches. The biggest push for PEPs, however, has centered on costs.”

And on that topic, “most MEP are quite small,” they stated. With half of such plans representing less than $10 million in assets and about three quarters of them having fewer than 100 participants, economies of scale might not be easily achieved. Data from one study showed that 30 percent of MEPs that have under $10 million have fees totaling 1.5 percent, according to the report. And in some cases, the plans are marketed to employers as being low cost, though that doesn’t necessarily mean that employees pay less than they would in a comparable 401(k) plan.

That said, the growth in the PEPs market and increasing size of pooled plan providers – the entities that sponsor them – could lead to lower fees over time, the authors wrote.

For 2024 the contribution limits for 401(k)s, including PEPs, is $23,000, while it is just $7,000 for IRAs.

“That is a huge advantage,” said Kelly Michel, a consultant who specializes in PEPs. “They can save vastly more money in a PEP versus an IRA.”

Despite a slight decline in the number of MEPs on the market, some providers switched to the PEPs model, Michel noted. The data only reflect trends through 2022, as regulatory filings made to the Department of Labor for 2023 won’t be available publicly until next year. By then, there could be more evidence of growth in the PEPs business, although the market may not take off for several years, Michel said.

“The industry has to have time to modify its record keeping systems to build products to support more self-service onboarding,” she said. “It took 40 years to get to the 401(k) market we have today.”

Retirement plan record keepers have been hesitant to offer services as pooled plan providers because they risk cannibalizing their existing businesses, she said. But it’s notable that Fidelity launched its own PEP several years ago, and providers such as Aon and Paychex have been attracting a variety of clients to their products, she noted.

She takes issue with the way some data are presented in the CRR report, including a comparison to the nearly 788,000 single-employer 401(k) plans in 2022 compared with about 4,600 MEPs. For example, it would be useful to compare the number of employers and participants in each plan type, she said.

Further, PEPs can be useful for financial advisors, as many don’t specialize in the retirement plan business. Clients who have small businesses can be well served through PEPs, as the set up work, cost, and fiduciary burdens can be attractive compared with traditional 401(k)s, she said.

“Most 401(k) plans are sold, not bought. That is a very important distinction.”