Switching to a pooled employer plan (PEP) can benefit your company and employees, but many people still have questions. Here we tackle a few of the most common ones so you can be better informed and better advised.
Not ready to jump into a pooled employer plan? Aon Global Chief Commercial Officer for Wealth Solutions Byron Beebe and Senior Partner and Aon PEP Leader Rick Jones address common barriers to making the change.
Why should we evaluate something new if our retirement plan works well?
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 plan sponsors are attracted to the efficiencies offered by a PEP. A PEP can potentially result in valuable cost savings for many organizations, allowing the management team to redirect their time and resources to strategic priorities while also providing a better participant experience.
Will the PEP cause us to lose flexibility?
Rick Jones: PEPs can deliver an industry-leading opportunity that still allows employers to customize the program to their needs, with the right matching contributions, the right eligibility and the right profit-sharing contributions. With other parts of 401(k) plan management handed to experts, a PEP allows companies to focus on strategic priorities instead.
With PEPs, employers have the choice of selecting different service providers. We partner with Voya, Grant Thornton, leading investment managers and TD Ameritrade in the Aon PEP. Other PEPs in the marketplace use other providers. So, PEPs 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.
How will participant experience and engagement be better?
Rick Jones: In several ways. Most importantly, the fee savings associated with a PEP can benefit participants financially. The average total plan cost savings we’re seeing in companies that have invested in our PEP instead of a standalone 401(k) plan is 48 percent.1 Typical 401(k) plans will deduct the cost of their services directly from participants’ earnings and balances, so if participants are experiencing lower fees, those dollars stay in their 401(k) accounts and 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.2
Participants benefit from higher-performing, more efficient 401(k) plans, with employees able to accumulate up to 11 percent more retirement savings during their career due to lower fees than typical 401(k) programs.3 According to Brightscope survey results, average 401(k) total plan costs are 0.39 percent and 0.63 percent for plans with $500 million and $50 million in assets, respectively.4 Estimated Aon PEP total plan costs for plans in this same size range are 0.23 percent and 0.28 percent. As noted above, the average savings experienced for “all in” administrative and investment fees by participants in the Aon PEP thus far is 48 percent.5 At the same time, these plans are producing 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 show 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.
Are there risks associated with being part of a new offering like a PEP?
Byron Beebe: There is a perception that PEPs are new and need time to mature. But think about the providers we use. Voya is our recordkeeper partner, and they serve over 6 million participants and have been offering these services for a long time. Aon has been in the retirement consulting business for a long time, and our investment business has been helping organizations pick investments for their 401(k) lineup for decades. So, those foundational things aren’t new. What is new is that the government has provided legislation to help us create efficiency and put all these players together in a different way. The services that participants are going to experience and the providers are the same.
We are also seeing data from companies that are part of the PEP, and it’s positive. Lower costs, engaged and satisfied participants,6 streamlined administration7 — all of these are tangible benefits. It’s understandable that companies need to get buy-in for something new, especially something that involves employees’ savings and trust in plan design and management. The numbers help make the case there. And we believe there are benefits to being a first mover in this highly competitive talent market as well.
Will a PEP disrupt our current processes and talent structure?
Byron Beebe: The PEP streamlines many things, which affects current roles and responsibilities. We rarely talk to an organization that feels overstaffed. Most organizations are looking for a way to free up their team to focus on high-value projects and strategic priorities. For instance, one large-scale change is that companies will no longer have to spend time internally picking investment options or negotiating fees for the 401(k) program on behalf of their participants. Having your PEP provider take on that responsibility means you’re spending less time managing the program and simultaneously incurring less risk.
Better yet, you won’t have to fill out the Form 5500 tax filing and sit with an auditor to go through the plan each year, nor will you 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 a part of the organization gets divested, it's easy for it 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. You don’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.
Disclaimer: The performance modeling featured is for Illustrative purposes and is not a guarantee of future results. Modeling assumes a 25-year-old employee with a $50,000 starting salary, $3,000 starting account balance, 4% annual pay increases, age 67 retirement, 3% initial savings rate with auto-escalation to 10%, invested in a diversified S&P through target date fund, and employer matching 100% on first 3% and 50% on next 2%. Income improvement in the Aon PEP assumes a 25 bps reduction in participant fees and the same modeling parameters. Total Lifetime Income is the 50thpercentile outcome using 5,000 stochastic trials based on expected returns using Aon Q2 2020 10-Year Capital Market Assumptions as of 3/31/2020 and Aon’s Real Deal spending methodology. There is no guarantee that results or savings will be achieved if you should select Aon to provide services to you. The experience described does not represent all recommendations made to clients, nor does it represent the experience of all clients. Investment return and principal value of an investment will fluctuate; therefore, there may be gain or loss experienced by the investor.
1 Aon analysis of PEP costs comparing Aon PEP administrative and investment fees to average 401(k) fees for similar plans. Base fee may not reflect all ancillary services selected by the employer. There is no guarantee that results or savings will be achieved if you should select AIUSA and/or its affiliated entities to provide services to you.
2 Aon Internal Modeling. See Disclaimer for details
3 Aon Internal Modeling. See Disclaimer for details
5 Aon analysis of PEP costs comparing Aon PEP administrative and investment fees to average 401(k) fees for similar plans. Base fee may not reflect all ancillary services selected by the employer. There is no guarantee that results or savings will be achieved if you should select AIUSA and/or its affiliated entities to provide services to you.
6 Aon PEP participant satisfaction score as of Dec. 31, 2021
7 Aon PEP 2021 client survey