Created by the SECURE Act, pooled employer plans (PEPs) were launched in 2021. As HR leaders look for ways to be better informed and better advised about their retirement benefit programs, they should take a hard look at whether a PEP is a good fit.
PEPs provide clear benefits for both employers and employees. When employers join together to offer a PEP, they have the potential to lower fees, improve retirement outcomes, provide better governance for plan fiduciaries and streamline plan administration. The challenges for many plan sponsors and fiduciaries are:
- 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 impact participants
Plan sponsors and fiduciaries should evaluate three key areas to determine whether a PEP will work for their organization and is in the best interest of their participants.
Investment Options Offered by the PEP
Employers should evaluate whether the investment options fit their overall benefits strategy and enhance retirement readiness. Less than one-quarter of employees in a recent survey were saving at a level considered adequate for retirement.1 Lower cost investment options mean that participants can save more.
Lower cost investment options mean that participants can save more.
A PEP will generally offer a consistent investment menu for all employees in the plan. To gain economies of scale, pooled plan providers will control what funds are available in the PEP. Some pooled plan providers may offer investment menus that include only funds from one investment manager. Others may select funds from a variety of managers selected through their investment due diligence process.
The pooled plan provider will likely select an 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. As named fiduciary to the PEP, the pooled plan provider has the fiduciary duty to monitor the investment manager. Employers will still 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. Many pooled plan providers and their investment partners will not take on fiduciary responsibility for the ongoing monitoring of employer stock, meaning that responsibility will remain with the plan sponsors.
Additionally, some PEPs will offer brokerage windows, whereas 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 the lack of liquidity these investments had compared to other options. Under new safe harbor rules from the SECURE Act, plan sponsors can switch annuity providers without disrupting participants' accumulated lifetime income. This happens by getting rid of surrender charges and additional fees previously associated with a provider change. Plan participants can now transfer their lifetime income option into another qualified retirement plan or an IRA. With PEPs, more 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. According to a recent survey, 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.2
User Experience Provided by the PEP
Pooled plan providers may offer more financial tools and a better participant experience than individual 401(k) plans, especially for employers that aren’t normally able to offer these programs at scale. 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. Plan sponsors 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, who will deploy best practices in retirement plan management and administration. The pooled plan providers' expertise can help reduce risk 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.
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 percent of cases analyzed, with an average cost savings of 48 percent.3
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 effectively gauge the benefits of a PEP. 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.
2 Poll of 415 respondents from Aon’s SECURE Act webinar
3 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.