Not ready to jump into a pooled employer plan (PEP) for your 401k benefits? Aon Global Chief Commercial Officer for Wealth Solutions Byron Beebe, and Senior Partner and Aon PEP Leader Rick Jones address the five most common barriers to making the change.
- Why should we evaluate something new if our retirement plan works well?
- How will participant experience and engagement be better?
- Are there risks associated with being part of a new offering?
- Will this disrupt our current processes and talent structure?
- Will we lose flexibility?
Byron Beebe: Many organizations who have a 401(k) plan think they are doing just fine; the recordkeeper is doing a good job, the investments are performing OK, and the fiduciary committee believes the 401(k) program is meeting expectations. But there could be a better way to deliver these retirement benefits, and we are finding that many companies are attracted to the efficiencies offered by a PEP. For many organizations, a PEP can result in valuable cost savings, allow the plan managers to redirect their time and resources to strategic priorities, and provide a better participant experience.
Rick Jones: In several ways. Most importantly, the fee savings associated with a PEP benefits participants financially. The average savings we’re seeing in companies that have invested in our PEP instead of a standalone 401(k) plan are in the mid-40 percent range1. Typical 401(k) plans will deduct the cost of their services directly from participants’ earnings and balances, so if participants are experiencing 40 percent lower fees, those dollars stay in their 401(k) accounts and really add up over a career. In fact, some conservative calculations suggest that just these lower fees can fund an extra two years of retirement spending. We’re seeing some pretty significant fee savings just from 2021 to 2022 in some cases.
In just a few short months, we’re seeing the economies of scale built into well-designed PEPs produce further savings and, at the same time, produce less work for management teams.
Finally, we’ve worked with Voya to help us deliver a large-market experience for employees — providing the most advanced tools to employers of all sizes. The size and scale of the PEP allow us to have PEP-specific collateral that speaks to diversity, equity and inclusion to make sure that people from all walks of life can access the plan and benefit from it. As a result, our case studies have shown a dramatic participation increase, which speaks to the robustness of the tools that allow people to get even more comfortable saving in a 401(k) plan. For example, participants have access to an app that an employer might not have or might have to invest in separately. That can encourage engagement — the information and options are at their fingertips, and the employer doesn’t need to go through any additional effort or investment to make that happen.
Byron Beebe: There is a perception that PEPs are new, and in a way they are. But the services and the providers of those services aren’t new. For instance, Voya is our recordkeeper partner and they’ve been offering these services for a long time. Aon’s wealth solutions business has been helping organizations with 401(k) plan design and investment selection since 401(k) plans have been in existence. So, the delivery of these fundamental services is the same. What is new is that the U.S. government has provided legislation to help us create efficiency and put all these players together in a different way.
Within the first year, we are measuring results for companies that are part of the PEP, and it’s positive. Lower costs, engaged participants, streamlined administration — all of these are tangible benefits. It’s understandable that companies need to get buy-in for something new, especially something that has such an important impact on employees. But the numbers make PEPs an attractive solution, and we believe plan sponsors will be compelled to move over a short period of time.
Byron Beebe: The PEP streamlines a number of things, which does affect current roles and responsibilities. But corporate staff will be freed up to focus on high-value projects and the strategic priorities of the organization. For instance, one large-scale change is that companies will no longer have to spend time internally picking investment options and/or negotiating fees for the 401(k) program on behalf of their participants. By having your PEP provider take on that responsibility, you’re spending less time managing the program and simultaneously incurring less risk. The people managing the 401(k) plan will be able to pursue opportunities that can improve other operations, like benefits and talent management, instead.
Better yet, they won’t have to fill out their Form 5500 tax filing and sit with an auditor to go through the plan each year, nor will they have to keep up with the nuances of always-changing laws and regulations.
Once you're in the PEP, there's less disruption from that point forward. For instance, if there's a part of the organization that gets divested, it's easy for it just to stay in the PEP rather than set up a new plan and a different plan document. Also, if there is a specific investment in a traditional 401(k) plan that's underperforming, companies are sometimes reluctant to make changes to the investment lineup because they must communicate that to participants so they can reallocate their money. That communication sometimes prevents fiduciaries from taking that fund away. In our program, once you've joined, you can invest your assets in big asset classes like large-cap equities or fixed income, and underneath those are individual managers. So, when an investment underperforms, we swap out the manager. The participant doesn't have to do anything.
The pandemic has caused many companies to think about how to work differently. The people who are spending a lot of time on these 401(k) plans today could be doing other, more strategic things.
Rick Jones: Right, the phrase that we've been using lately is “avoid uncompensated risks,” meaning take risks and do the work which presents an upside, and don't do the things that aren't going to help you be a better employer. Pursue opportunities that give you the chance to improve the benefits, scale and outcome for end-user participants.
Rick Jones: As the PEP market matures, employers will have the choice of selecting different service providers because they'll be able to choose different PEPs that leverage those providers and compare that option to their current situation more easily. We use Voya and Grant Thornton as our principal service providers, and we also utilize leading investment managers and TD Ameritrade. Other PEPs in the marketplace use other providers. So, PEPs will ultimately provide choices for different solutions, structures and service providers.
The benefit of the PEP is that companies don't have to negotiate with each of those individual carriers. They can get the economies of scale as we negotiate for them. Over time, as PEPs get built out even more, there will be more choices, and companies won't have to go into the market to negotiate and select providers. They can trust us to do that on their behalf.
PEPs can potentially deliver a best-in-class opportunity that still allows employers to customize the program to their needs, with "best fit" matching and profit-sharing contributions, as well as the right eligibility and vesting provisions for their workforce. With other parts of 401(k) plan management handed to experts, a PEP allows companies to focus on strategic priorities instead.
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