Pooled Employer Plans Are Here: Why Pooled Retirement Plans Are Changing the 401(k) Market
An innovative option for defined contribution retirement benefits launched in 2021. Here’s how busy HR and finance leaders can get an edge by understanding their value.
For several years, pooled employer plans (PEPs) have been gaining momentum globally. As the name implies, these next-generation defined contribution retirement plans allow employers to combine their retirement plans with other businesses. This means less administrative work, less risk and lower costs for employers. Employees, too, may benefit since the lower fees can lead to more assets in their retirement plans. Employees can also receive better support – leading to improved participant behaviors and better retirement outcomes.
Thanks to 2019 legislation, American employers (regardless of location or industry) can join PEPs. These cost-saving retirement options arrived at a fortunate time for plan participants, as the effects of the pandemic continue to hinder workers’ financial wellbeing. According to a recent survey, nearly three in 10 Americans decreased or stopped saving for retirement during the pandemic.1 Even before that, research showed that only one in three U.S. workers would have enough saved to retire comfortably by age 67.2
With this backdrop, PEPs have the potential to have the same kind of impact on retirement savings that 401(k) plans did when they were created in 1978. While it’s early days for American PEPs, the past may serve as a guide to their potential growth. Driven by large companies, the growth of 401(k)s in the early 1980s exploded, and they soon became the dominant type of retirement plan. Similarly, Aon predicts more than half of U.S. employers will be using PEPs by 2030.
As organizations begin to assess which PEP may work for their organization, it’s important to keep in mind that not all PEPs are the same. Many PEPs focus primarily on small companies who want to leverage the scale that a PEP provides, while others cater to a broader array of companies who want the benefits and experience of a large company’s plan.
Making better decisions means being better informed, so here are some of the benefits of a PEP to consider while navigating this new retirement landscape.
Less Administrative Work
With a traditional 401(k), benefits managers have to coordinate record keepers, auditors, legal compliance teams, investment teams and employees. The process is simpler in a PEP.
After a brief transition with a conversion team, specifying the plan design and contribution levels, the HR professional’s job is simply to monitor the plan. The pooled plan provider of a PEP supports the administrative, investment, compliance, consulting and legal requirements of running the plan.
Some PEPs also provide support and training materials like pre-built communications, financial wellbeing support tools, videos and email templates, so HR professionals can quickly bring employees up to speed. All of these advantages can be enjoyed without sacrificing the current plan design. By potentially decreasing the work to manage these retirement plans, HR employees are freed up to focus more on their organization’s mission-critical activities.
Less Risk for Employers
One of the biggest advantages of a PEP is the ability to transfer much of the fiduciary responsibility and liability to the plan provider. That’s become more important in recent years as the risk of defined contribution plan litigation has soared. From 2018-2020 there was a four-fold increase in excessive-fee lawsuits, and in the last decade, more than $1 billion in settlements have been paid.3
The risk can drop dramatically with PEPs because the pooled plan provider takes on much of the fiduciary responsibility and liability. PEPs offered by large companies like Aon also draw on their experience with retirement solutions and mitigating risk for organizations of all sizes. A PEP can be right for any sized organization looking to reduce its risk.
Lower Costs, More Services
The secret to the cost savings associated with PEPs is the economies of scale a PEP creates, which can lower employers' costs for everything from recordkeeping to investment fees. Participants in more efficient 401(k) plans can accumulate more retirement savings based on these lower costs. Compared to an average 401(k), for example, the participants in Aon’s PEP save an average of 48% on administrative and investment fees.4
For example, a PEP like Aon’s can leverage its existing expertise in retirement and investment solutions. Partners like Voya Financial, the sixth-largest record keeper in the U.S.,5 can be brought in to collaborate on innovative solutions offered by the largest of employers. Small and mid-size companies can then join a plan with the kinds of tools they couldn’t access on their own. A PEP like Aon’s also works particularly well for specific situations like mergers and acquisitions, providing a “pre-built” solution with the flexibility to handle multiple situations and employers.
Another benefit of scale is that PEPs can offer tools that smaller sponsors could not provide on their own, like services to help participants manage their student loans or coordinate their retirement plans with health savings accounts.
PEPs will significantly impact the retirement landscape, and employers and employees can reap the benefits. Learn more to find out if a PEP is the right approach for your organization.
1 FinanceBuzz, COVID-19 Derails Retirement Contributions: 27% of Americans Have Decreased or Stopped Saving
2 Aon, Mind the Gap: Only 1 In 3 U.S. Workers Are Prepared for Retirement
3 Aon FSG tracking of DC plan excess fee lawsuits and January 2021 Client Alert
4 As of 3/31/2022, based on signed Aon PEP clients who compared the total 401(k) cost in the Aon PEP against their prior 401(k) plan.
5 RPA Convergence, Largest DC record keepers