The move away from defined benefit pension plans over the past 30 years is nearly complete. In fact, as of 2023, fewer than one in five private sector employees had access to a defined benefit plan. Such data highlights the importance of individuals utilizing various retirement savings vehicles, including 401(k)s and other employer-sponsored plans.
However, for small businesses in particular, the cost and administrative hurdles associated with establishing and maintaining a retirement plan are prohibitive. Fewer than six in 10 small businesses (under 100 employees) offered a retirement plan as part of their benefits package as of 2023. With small businesses employing over 45% of American workers, this lack of access becomes increasingly troubling as more and more Americans struggle to reach their retirement income goals.
Enter the Pooled Employer Plan (PEP).
Created by the SECURE Act, PEPs allow multiple employers to pool their resources and provide retirement plans to their employees with lower financial and administrative burdens. Additionally, the pooled plan providers (PPPs) who manage these PEPs assume much of the fiduciary responsibility, lowering the company’s liability.
Despite the tangible benefits they offer, PEPs are not yet resonating with a large swath of business owners. A lack of awareness is one possible reason. Anxiety around control and complexities may be impacting adoption as well. To garner additional insights into these products, their advantages and what the future may hold, I spoke with executives from three firms active in the PEP space:
- Mark Foster, Managing Director, Retirement Plan Consulting, SageView Advisory Group, which serves retirement plan sponsors and individuals
- Victor Hicks II, Wealth Advisor and Managing Director of advisor-led, independent wealth management firm Perigon Wealth Management; and
- Jeff Atwell, Senior Vice President, Fiduciary Services at FiduciaryxChange, part of AmericanTCS. AmericanTCS provides brokerage, advisory and trust services.
Foster: The PEP structure represents a significant evolution in the retirement plan landscape, offering small and mid-sized employers access to institutional-quality retirement plans with greater efficiency and reduced administrative burden.
SageView recently entered the PEP space because we see growing demand from employers looking for turnkey retirement solutions that balance cost, fiduciary risk and employee outcomes. The regulatory environment and market readiness have aligned to make PEPs a compelling solution, and we are leveraging our experience and scale to deliver a high-quality option.
We expect more firms to explore and enter the PEP space. As awareness grows and more employers seek simplified retirement plan solutions, the demand for pooled structures is likely to increase. However, the key to success will be experience and execution. Firms with deep retirement expertise, operational excellence and a commitment to participant outcomes, are best positioned to deliver real value in this evolving market.
While we anticipate more entrants, we also believe there will be a clear distinction between those who can truly deliver a best-in-class PEP experience and those simply following the trend.
Hicks: PEPs officially launched in January 2021 — unfortunately, right in the middle of a global pandemic. In my community of advisors, we didn’t give it much attention. Our small business clients were focused on employee retention and keeping the doors open. Supply chains were a mess, and inflation hit historic levels.
The launch timing wasn’t ideal, but it was incredibly necessary, as government officials are still working to address the financial insecurity of American workers. To promote retirement savings access among small employers, PEPs were designed to help them overcome three common hurdles: access, administration and fiduciary risk.
PEPs offer turnkey solutions with professional fiduciaries who handle the heavy lifting. Think of it as a shared 401(k) plan with centralized administration, compliance and investment oversight.
Like most things, however, there have been unforeseen challenges. Even now, several years after their introduction, PEP adoption has not taken off the way we had hoped.
PEPs may not be the perfect solution today, but they’re getting better. Providers are refining their platforms. Tech is improving. And as more states roll out retirement plan mandates, employers will look for alternatives to the state-run IRA options.
Atwell: I look at the evolution of the PEP concept very similarly to the evolution of the 401(k) plan. Initially, 401(k)s were established in very inefficient operating conditions, but as technology evolved, recordkeeping and administrative processes improved. This led to much lower costs and better resources for plan sponsors and participants.
There are still challenges to the PEP environment. One is when the financial advisor or organization does not properly communicate the responsibility that the plan sponsor will retain. While PEP regulations allow for the outsourcing of as much of the responsibility of the governing plan as possible, adopting employers still have some responsibility in the PEP. These distinctions should be effectively communicated so the plan sponsor can make informed decisions about joining a PEP.
Also, not all PEPs are built the same. It is important for the financial advisor or plan sponsor to understand what responsibilities the Pooled Plan Provider (PPP) retains and what roles the PPP passes on to other service providers or plan participants.
Sander Ressler is Co-Owner and Managing Director of Essential Edge, a consultancy specializing in compliance and regulatory affairs for broker-dealers and RIAs.
