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There’s a new sheriff in town when it comes to the 401(k) arena. It’s called a 401(k) Pooled Employer Plan (or “PEP” for short).
The industry has been waiting for Congress to approve this next generation 401(k) for years. They finally did in 2019 and President Trump quickly signed it into law.
So-called “open” PEPs (i.e., PEPs available to everyone) became effective in January 2021. Do you know what they are? If not, you better learn fast.
PEPs, as the name suggests, represent a single umbrella plan under which many employers can house their company’s 401(k) plan. It promises to be easier, cheaper and better as it can achieve economies of scale much faster than stand-alone 401(k) plans.
This is not new technology. It has been available and in use for years, both here and abroad. For decades, industry groups, locally-based Chambers of Commerce, and other associated business entities have been using them. (These are called “closed” MEPs because membership is limited by some defined commonality.)
“Using a pooled structure where multiple employers use the same retirement plan is very common in other countries,” says Catherine Reilly, Director of US Retirement Solutions at Smart in Cambridge, Massachusetts. “We would expect these to become increasingly common in the US, particularly among small employers.”
If your company isn’t offering a retirement plan, it may find PEPs offer a way to overcome whatever obstacles it may be facing. And, if your firm isn’t aware of PEPs, maybe you should let your employer know what they’re all about.
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“PEPs offer the potential to reduce expenses over time and perhaps quickly,” says Steve Rogers, CEO, Shelton Capital Management in San Francisco. “Savers should stand ready to push their employers to transition when lower cost plans become available.”
As an employee, PEPs can present advantages over and above your existing 401(k) plan. That’s why a number of those who have formally submitted applications to create PEPs under the new law are seeing interest primarily among companies with stand-alone 401(k) plans.
“Retirement savers should understand that PEPs are the next stage in the evolution of 401(k) plans and that they bring together existing capabilities and related economies of scale to provide even better retirement plan options,” says Rick Jones, Partner at Aon
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in Lincolnshire, Illinois. “This will result in better retirement outcomes through decreased cost and better ultimate plan returns, as well as new plan services and options—all designed to produce a better and more secure level of retirement income.”
In many cases, if your existing 401(k) plan converts to a PEP, you may not even notice. The electronic gateway may be different, but the benefits can be exactly the same if your firm does a good job in screening PEP candidates. If this is the case, the change will be seamless to you.
“Individual employees and retirement savers really don’t need to know much as these plan types really shouldn’t be a significant deviation from their current platform experience,” says Brian Haney, Founder and Vice President of The Haney Company in Washington DC. “Savers need to understand how to use the digital platform effectively for themselves, availing themselves of the learning and self-help resources each provider offers, and also taking advantage of any additional advice available, either by the plan’s adviser/broker, or through customer service advice lines many providers already offer.”
The bottom-line: you shouldn’t be alarmed if your company moves into these new plans. From your point-of-view, you’ll still be able to save how you’ve been saving, your company will still be able to match like it has been matching, and you’re more than likely to pick from the same generic types of investments you’ve always had to choose from. Of course, there’s no harm in confirming this with your employer.
“Retirement savers should understand that PEPs can offer many of the same benefits as a traditional 401(k) Plan, providing a vehicle for employees to save for retirement and invest in a variety of investment options,” says Liana Magner, Partner and US Delegated Defined Contribution Leader at Mercer LLC in Boston. “Retirement savers should be aware of the benefits that their plans provide whether in a PEP or other type of qualified retirement option.”
On the other hand, moving to a PEP may entail changes. If the right PEP is selected, this may be a very good thing, especially if you’re coming from a small plan.
“A PEP allows employers to offer its employees better options than it would have been able to on its own, with greater access to a wide variety of options and low-cost share classes that would ordinarily have not been available to a small plan,” says Syed Nishat, Partner at Wall Street Alliance Group in New York City. “This is a big advantage for retirement savers who are part of the plan. This provides better savings options as well as the choice of funds that can be fully diversified for the protection of the investors in the plan. These lower costs will be passed on to all participants in the PEP.”
If you’ve been paying attention, you’ll notice several times the words “screening” or “selecting” the right PEP are mentioned. While there are only a few dozen who have applied to offer PEPs right now, this number is expected to accelerate. There are going to be a lot of choices. Some may be ideal for your company. Some may be less than ideal.
“While I’m usually considered an ‘early adopter’ myself, I’m hesitant to advise businesses to jump into a PEP,” says Nancy Cox, Partner and co-leader of the employee benefit plan practice at The Bonadio Group in Buffalo. “It will be interesting to see how PEPs will be administered and how many different service providers will need to be involved in the process. Plan sponsors need to fulfill their fiduciary responsibilities and ensure they have a good understanding of PEPs before entering into one, in my opinion. If I were a plan fiduciary, I’d definitely want to have an understanding of how investment and other decisions will be made and what my role would be in the process.”
The onus, then, will be on the Pooled Plan Provider (“PPP”) to present the PEP in a way that clearly shows its benefits to the employer and its employees.
“A good PPP will provide employees with a good range of tools to set them up for success,” says Nishat. “This will allow them to benefit from things often only available to those in larger plans, such as online enrollment and employee portals to keep an eye on their accounts.”
Your company should not let the perfect be the enemy of the good. Even a less than ideal PEP may be better than the 401(k) your company can offer.
“There are many plans that currently don’t have a solid fiduciary process, and a PEP could provide for sound investment advice and positive plan provisions that are not currently offered,” says Cox. “At the end of the day, if PEPs have a role in establishing retirement savings for a business that otherwise would not have a plan, it will be positive.”
And this may be the most important thing for you to learn. PEPs offer companies a new and maybe improved way of helping you save for your retirement. It’s still your job to act in your best interests. And that could involve you taking an active role in convincing company management to look into the PEP option.
“The biggest thing for retirement savers to know is that there are more options than ever before,” says Daniel Beck, co-founder of 401GO in South Jordan Utah “If their employer isn’t providing something, they need to speak up and help their company realize a retirement benefit is more attainable than ever before.”