Created by the SECURE Act, the first pooled employer plans launched on January 1, 2021. As HR leaders search for ways to make their retirement benefit programs more effective, they must take a hard look at whether a PEP is a good fit.
Pooled employer plans provide clear benefits for both employers and employees. When employers band together to offer a PEP, they can help lower fees, improve employees' retirement outcomes, provide better governance for plan fiduciaries, and streamline plan administration. The challenge for many plan sponsors and fiduciaries is:
- How to evaluate whether a PEP is appropriate for their employees (an employer decision)
- Which pooled plan provider to select (a fiduciary decision)
- How those decisions will affect the future of their organization's retirement benefits and will impact participants
Plan sponsors and fiduciaries should evaluate three key areas to determine whether a PEP will work for their organizations and is in the best interest of their participants.
Investment Options Offered by the PEP
Employers have to evaluate whether the investment options fit their overall benefits strategy and enhance retirement readiness. Roughly two-thirds of American private-sector workers already contributing to their retirement income plans are below target to meet retirement income needs at age 67.
Lower cost investment options mean that participants can save more for retirement.
A PEP will generally offer a consistent investment menu for all employees in the plan. To gain the economies of scale, pooled plan providers will have to control what funds are available in the PEP. Some pooled plan providers may offer investment menus that include only funds by one investment manager; others may select funds from a variety of managers seleced by the provider through the relevant investment due diligence process.
The pooled plan provider will likely select an ERISA 3(38) investment manager for the PEP that will have the discretion to make investment decisions. In this case, the plan sponsor has no specific fiduciary responsibility regarding the funds in the PEP since they have delegated responsibility to the pooled plan provider. In its capacity as named fiduciary to the PEP, the pooled plan provider has the fiduciary duty to monitor the 3(38) investment manager. Employers will have a fiduciary duty to monitor the pooled plan provider.
If a plan currently offers employer stock as an investment option, fiduciaries will need to consider how the pooled employer plan will address that option, recognizing that many pooled plan providers and their investment partners will not take on fiduciary responsibility for the ongoing monitoring of employer stock (so that responsibility remains with the plan sponsor fiduciaries).
Further, some PEPs will offer brokerage windows, where others may not. If employees want access to a brokerage window, that should be considered when selecting a pooled plan provider.
Many PEPs will have lifetime income options. Historically, plan sponsors were hesitant to offer annuities in 401(k) plans because of how illiquid these investments were compared to other options. Under new safe harbor rules from the SECURE Act, plan sponsors now can switch annuity providers without disrupting participants' accumulated lifetime income by avoiding surrender charges and additional fees associated with a provider change in the past. Plan participants can now transfer their lifetime income option into another qualified retirement plan or an IRA.
With PEPs, small and midsize employers will have access to lifetime income options that can shift how employees view retirement savings from lump sums to monthly income streams.
Employers are excited by the possibilities of lifetime income options. Almost half of plan sponsors think the SECURE Act's lifetime income provisions will have the most significant impact on retirement programs in the next five years, according to a recent survey.
User Experience Provided by the PEP
Pooled plan providers may offer more financial tools and a better participant experience than individual 401(k) plans; this is especially true for small and midsized employers. With scale comes the opportunity to bring a well-designed participant experience to more workers.
Each pooled plan provider will bring a different set of capabilities to the table. Fiduciaries should understand what those capabilities are and whether those features align with their overall benefits strategy and are in participants’ best interests.
Organizations should know what tools and experiences their employees value. For example, some plan providers offer tools that help with student loans or give participants a better picture of how their health savings accounts can improve their retirement readiness.
Administration Burdens Eased by the PEP
Employers can outsource certain fiduciary responsibilities to pooled plan providers, which will deploy best practices in retirement plan management and administration. The pooled plan providers' expertise can reduce risks as employees plan for their retirement security and compliance and litigation risks to companies that use PEPs.
With simplified (and outsourced) plan administration through a PEP, HR departments can free up time to devote to more pressing strategic initiatives while potentially reducing the risks of providing retirement benefits.
In an analysis of various plans, PEPs appear to produce savings relative to single employer 401(k) plan fees in 94% of cases analyzed, with an average cost savings of 46%.
Plan sponsors should understand how much time and effort their internal staff (including HR and finance departments) spend administering their current defined contribution plans to gauge the PEP benefits effectively. Beyond potentially lower costs, having a pooled plan provider manage the 401(k) plan’s administration and day-to-day activities frees up internal staff to work on more strategic initiatives that align with an organization's business goals.
 Poll of 415 respondents from Aon’s SECURE Act webinar
 Aon analysis of PEP costs. There is no guarantee that these results or savings will be achieved.
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