Providers Assess Opportunities in the Nascent Pooled Employer Plan (PEP) Market

January 6, 2021 — Boston

PEPs and the expansion of retirement plan options available to small businesses will intensify competition in the small plan market

The Setting Every Community Up for Retirement Enhancement (SECURE) Act allows employers without a common nexus (i.e., employers operating in unrelated industries or geographic areas) to join a pooled employer plan (PEP). Public policy advocates and market practitioners suggest PEPs could be instrumental to helping close the retirement plan “coverage gap” by enabling small business owners to achieve costs savings through economies of scale and offload some of the administrative burdens associated with offering a standalone retirement plan. For providers, PEPs may represent an opportunity to achieve a stronger presence in the small plan market, according to Cerulli’s report, U.S. Retirement Markets 2020: Exploring Opportunities in the Small Plan Market.

Cerulli finds one-quarter (26%) of 401(k) plan sponsors indicate they are at least somewhat interested in joining a PEP. Although many industry stakeholders, including the Department of Labor (DOL), suggest PEPs are well suited for smaller entities, plan sponsors with less than $5 million in assets exhibit less interest than plan sponsors in other asset segments—and more than one-third (36%) of plan sponsors in this “micro” segment indicate they have no opinion on the topic. “This may be the sign of a knowledge gap related to PEPs in the lower end of the market,” says Shawn O’Brien, senior analyst. “When addressing smaller employers, more educational discussions related to the costs and benefits of PEPs may be in order.”

Recordkeepers, advisors, and asset managers also exhibit varying levels of interest in PEP opportunities—some have already announced plans to launch a PEP in 2021 while others are taking a “wait and see” approach to PEP opportunities. For instance, Cerulli finds only 17% of defined contribution (DC) recordkeepers are actively pursuing PEP business and plan to act as a pooled plan provider (PPP), while 39% indicate they would consider participating in the PEP market if approached by an advisor or consultant. Of the advisors who plan to offer a PEP, the majority expect to target “micro” and “small” plans with $25 million or less in plan assets. Providers targeting these smaller asset segments may also look to gain adoption from employers without an existing workplace retirement plan. For these employers, Cerulli suggests PEPs will be “sold, not bought.”

As recordkeepers, asset managers, third-party administrators (TPAs), and intermediaries navigate PEP opportunities, configuring an effective service model will be crucial. Cerulli suggests the flexibility around the type of individual or entity that may serve as a PPP, along with the range of fiduciary responsibilities involved in operating a PEP, could lead to a variety of models. “Providers considering the role of PPP need to be aware of the 3(16) fiduciary responsibilities involved,” says O’Brien. “Recordkeepers and TPAs are seemingly a natural fit for this role.”

PEPs aside, other providers have launched bundled solutions geared toward smaller plans to broaden their market presence and create new product distribution opportunities. Providers seeking to gain adoption in the small plan market must contend with the unique demands and constraints of small business employers and grasp the competitive differentiators specific to this market segment. Cerulli asserts developing a simple, cost-conscious, easy-to-onboard 401(k) solution is merely the first step to succeeding in the small plan market. Providers will also need to guide plan sponsors through some of the challenges associated with administering a retirement plan. “It’s important to remember small businesses often lack the benefits personnel and investment committees often housed within larger organizations,” says O’Brien. “Smaller plan sponsor clients aren’t necessarily looking for a best-of-breed custom target-date fund or a robust financial wellness program. Rather, they want a provider that can support them through the administrative challenges of offering a retirement plan.”

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