Resetting Pooled Employer Plan Expectations

It’s a staggering statistic: About 56 million American workers in the private sector lack access to an employer-sponsored retirement plan. It’s no surprise that the retirement system in the United States barely gets a passing grade in almost every global study. For a country as rich and advanced as ours, it’s an embarrassment that so many workers have no way to save for retirement through their employers. And without access to an employer-sponsored plan, most workers aren’t going to save for retirement. I’ve always said that we don’t have a retirement crisis in this country—we have a coverage crisis.

The SECURE Act attempted to address this issue with the introduction of a new type of multi-employer plan called pooled employer plans (PEPs). Despite launching with high expectations in 2021, PEPs remain obscured in a cloud of confusion and have seen limited adoption. If you peruse any article about PEPs, you’ll likely see the author hedging the benefits of PEPs using phrases such as “may reduce costs” and “will potentially eliminate some of the administrative burdens” compared to a standalone plan. One reason for this approach is because there are many inconsistencies in how PEPs are designed, operated, priced, and distributed.

Thankfully, the Department of Labor (DOL) has made efforts to confront some of these challenges by refocusing on PEPs. In late July, the agency announced anticipated guidance (RIN 1210–AC10) for employers and advisors who are considering this option. Accompanied by a request for information on ways to drive more adoption, this guidance—though limited—is long overdue, as PEPs have raised questions over what fiduciary and administrative responsibilities an employer inherits in these types of structures.

After a somewhat dismal start, PEP adoptions appear to be increasing at a rapid pace—in part driven by state mandates and a push by legislators, regulators, and industry groups to expand coverage. Transamerica recently published a survey of 400 employers who adopted a retirement plan and found that nearly half of them (47%) selected a PEP. It’s worth noting that Transamerica has done a great job informing current and prospective clients about the benefits of PEPs. And unsurprisingly, education is the key to unlocking PEPs’ full potential. Still, 77% of respondents had no idea what a PEP was before adopting one. The old adage that retirement plans are sold, not bought, continues to apply in our industry. If the DOL truly aims to increase adoption, then an examination of how Transamerica distributes and sells PEPs would be a good start. Driving more consistency in PEPs and creating more awareness are, hands down, the two main ways to inspire employers to adopt a PEP.

One of the most interesting items tucked into the DOL’s guidance is a proposal to implement a potential safe harbor that would eliminate any employer liability for the investments in a PEP. Today, the employer is seemingly on the hook for not only monitoring the pooled plan provider (PPP) but also the underlying service providers, including the 3(38). Under the proposed safe harbor, the PPP would have the sole responsibility for the ongoing monitoring of the 3(38) and its investment decisions. That’s a significant relief for the employer, and I’m fully supportive of this proposal if it encourages them to offer a retirement plan. But I have my doubts that this will move the needle. 

An obstacle I don’t think the safe harbor will resolve is that the employer would still need to do their due diligence when selecting the right PEP, which means not only vetting the PPP but also the fund lineup. That’s no easy task, even for the most skilled employer or advisor. When you look under the hood of most PEPs, the entities responsible for building and managing the lineup run the gamut—from national fiduciary service providers like Morningstar Investment Management to lesser-known RIAs with minimal track records in lineup design and management. This makes it harder for the employer to vet the fiduciary’s methodology, the quality of the investment decisions, and the ongoing monitoring process. It also becomes a challenge for the employer to ascertain if the lineup is aligned with their needs and the needs of the plan’s demographics. But there are many strategies to overcome this challenge, which I will talk more about in my upcoming blog.

At the end of the day, there’s no silver bullet that will close the coverage gap in this country. As an industry, we’re making great strides with PEPs, tax incentives, state mandates, new technologies, digitally-forward recordkeepers, and lower-cost fund options in standalone plans. The DOL’s latest guidance and request for information will hopefully narrow that gap. But we need to do more to make it even easier for employers to adopt a retirement plan. With 56 million Americans in a state of suspense, it’s a worthwhile cause.