Data and Research October 6, 2020

How Will the PEP Market Develop in Early 2021?

One provider getting ready to launch a SECURE Act-enabled pooled employer plan on January 1 expects plan sponsor take-up to start slow but build significantly over time.
Reported by

Though the Setting Every Community Up for Retirement Enhancement (SECURE) Act includes many popular provisions, among the most favored is its authorization of a new type of retirement plan known as a pooled employer plan, or “PEP” for short.

As defined by the SECURE Act, PEPs are somewhat similar to already fairly well known multiple employer plans (MEPs), with some key differences. Among these is the fact that a PEP must be administered by an approved entity called a “pooled plan provider,” or “PPP.” The SECURE Act allows pooled plan providers to start operating PEPs beginning January 1, 2021, but it also requires pooled plan providers to register with the Secretary of Labor and the Secretary of the Treasury before they begin operations.

Get more!  Sign up for PLANSPONSOR newsletters.

Retirement plan industry analysts and attorneys are expecting that entities interested in becoming pooled plan providers will include banks, insurance companies, broker/dealers (B/Ds) and similar financial services firms, including pension recordkeepers and third-party administrators (TPAs). These entities, with their complex financial arrangements with employee benefit plans, have in the past needed and been given exemptive relief by the Department of Labor (DOL), through its statutory authority under the Employee Retirement Income Security Act (ERISA), in order to avoid prohibited transactions and conflicts of interest. In August, the DOL published a Notice of Proposed Rulemaking (NPRM) that seeks to implement various registration requirements for emerging pooled plan providers, while also inquiring about the need for the creation of a new exemption.

Reflecting on all these developments, Tim Werner, president at BlueStar Retirement Services, says it is an exciting time to be in the recordkeeping and TPA business. He describes his firm as a pure-play recordkeeping and TPA shop, meaning it does not engage in other, related lines of business, such as providing financial advice or selling mutual funds.

Werner tells PLANSPONSOR that BlueStar began working with MEPs even before he came in to lead the company back in 2004. He says having experience with MEPs, along with his firm’s longstanding focus on creating in-house recordkeeping and TPA solutions that do not rely greatly on third-party technology, prepared the firm to “step up and be one of the very first pooled plan providers.”

“Along with a select number of other peers, we are going to be ready with a PEP solution on January 1,” Werner says. “Exactly what that first day or month looks like in terms of plan sponsor demand remains to be seen. I personally do not expect a tidal wave of interest on day one.”

Data about the existing MEP market collected as part of the 2020 PLANSPONSOR Recordkeeping Survey offers some context. Though, as stated, MEPs and PEPs have key differences, interest in MEPs is a reasonable proxy for forecasting the kind of early interest providers could see for PEPs. 

The PLANSPONSOR data found responding recordkeepers (who collectively work with the vast majority of U.S. retirement plans), currently operate more than 3,600 MEPs, run on behalf of nearly 30,000 employers and 1.4 million participants. Looking at the asset sizes of the individual adopting employers is an eye-opening exercise, showing that interest seems strongest in the sub-$1 million and sub-$5 million categories. But there are quite a few employers in all asset ranges that are in these MEPs, and, in fact, the data shows something of a barbell distribution, with several thousand large employers participating in MEPs today.

Based on his conversations out in the marketplace, Werner says the idea that PEPs could be cheaper than traditional single-employer retirement plans is appealing to many small plan sponsors. But, at least in his experience, he says the lion’s share of demand for PEPs is going to come from plan sponsors that simply want to offload the responsibility of running and monitoring the retirement plan.

“It’s interesting, because in that sense I actually think mid-sized employers may drive some of the early interest,” Werner says. “Much of the conversation has focused on the ability of small businesses to come together in PEPs, and I expect that will happen. However, one adviser I spoke with just last week told me they have five or more plan sponsors in the $50 million to $100 million range that are keenly interested in being in a PEP—all because of the potential to offshore some of the fiduciary responsibility and the daily processing involved in running a plan. For these particular employers, the PEP discussion is not entirely or even mainly about cost.”

Werner says plan sponsors are not the only group of industry stakeholders that could see a big impact from the expansion of MEPs and PEPs.

“We continue to have a number of discussions with registered investment advisers [RIAs] wherein they are trying to figure out how they fit into a marketplace where PEPs become much more popular,” Werner observes. “Some are asking us whether they should set up their own PPP, or perhaps whether they can work with us to be the PPP, or whether this is a role for a different third party. It’s very dynamic, but many of the people I speak with are also concerned and interested in this idea of whether they can get the necessary prohibited transaction exemption that they feel they would need to serve as the 3(38) fiduciary investment adviser on a PEP.”

Werner says he expects many traditional retirement plan advisers will be reticent to step into this space until regulators issue clarifications.

“As the market develops, I expect that, in some cases, we will be the recordkeeper and TPA for another provider’s PEP or even an adviser’s PEP, while in other cases we will be the PPP and handle everything,” Werner speculates. “Overall, we are excited about the concept and what it means for getting more people covered in retirement plans.”

Ilene Ferenczy, managing partner of Ferenczy Benefits Law Center, agrees broadly with Werner in arguing that the main reason why employers may be interested in PEPs will not necessarily be the appeal of lower costs, but the advantage of offloading the fiduciary and administrative responsibility and liability to another entity.

“MEPs and PEPs are also appealing for small companies just starting out with their 401(k) plan that don’t have a lot of assets and negotiating abilities,” Ferenczy says. “They give them access to service providers they normally wouldn’t have access to.”

As Daniel Milan, financial adviser and managing partner of Cornerstone Financial, notes, according to the DOL’s own estimates, as of March 2018, approximately 85% of businesses with 100 or more employees offered a retirement plan—whereas only 53% of businesses with fewer than 100 employees did so.

“Some of the reasons smaller businesses choose not to offer a retirement plan include regulatory complexity, cost and exposure to potential fiduciary liabilities,” Milan says.

However, MEPs have largely failed to gain much traction in this space because they require companies that join to have a commonality, or a nexus, Ferenczy says. PEPs do away with this requirement and, therefore, could be more popular. MEPs have also been subject to the “one bad apple” rule, whereby the entire group can be disqualified if just one of the companies fails to comply with the rules—another hurdle that is addressed by PEPs.

Compliance October 1, 2020

Auditors’ View of Plan Management

Auditors share common errors they find when doing retirement plan financial audits and what they recommend for plan sponsor processes.
Reported by
Art by Alessandra De Cristofaro

It might seem like more plan sponsors than usual would file for an extension of Form 5500 filing this year because of the extra work put on them by the effects of the COVID-19 pandemic.

But Bradley J. Bartells, certified public account (CPA) and a partner at MUN CPAs in Sacramento, California, whose firm performs “about 50 large plan audits,” says he’s seen the same number of extensions as in prior years. He notes that some plan sponsors that file for an extension just like to do their filing later, and others do so because it takes them longer to get all their information together.

Get more!  Sign up for PLANSPONSOR newsletters.

Jennifer Moore, director of 401(k) audit services at PriceKubecka, says recordkeepers normally file extensions automatically. The majority of her firm’s clients extend their filing.

Moore says it’s been an interesting year with the COVID-19 pandemic. Even this late, her firm is getting many calls from plan sponsors trying to find auditors. “Businesses have been closed for so long, they are trying to get back into the swing of things,” she says. “I think the DOL [Department of Labor] will see a lot of filings coming at the deadline.”

With the extension deadline coming up on October 15, Bartells and Moore shared their concerns and suggestions for plan sponsor processes.

Although it’s called a financial audit, auditors examine many things in retirement plans. Bartells says auditors get items they need from payroll providers, plan custodians and third-party administrators (TPAs) or recordkeepers. However, from plan sponsors, auditors need minutes from the meetings of plan trustees or oversight committees. “A lot of plan managers don’t keep minutes, so there’s no evidence or documentation that they are exercising their fiduciary duties. Even some of our repeat clients are not consistent about it,” Bartells says. “There are so many lawsuits out there against plan sponsors about fees and investments. If they would just document how they benchmark or how they came to decisions, they would probably save a lot of money on defense costs.”

In a LinkedIn post, “401k plan concerns – from the auditor perspective,” Bartells says there are still plans that haven’t even established and formalized an oversight committee. Plans need “to have an oversight committee which regularly meets to review plan activity and perform tasks that will be subsequently discussed. The oversight committee for the plan should include the named fiduciaries of the plan, as well as key members of management who are involved in the day-to-day operations of the plan. I recommend the oversight committee for the plan meet no less than quarterly,” he says in the post.

As for keeping meeting minutes, Bartells’ article says, “From an auditor perspective … if it’s not documented, then it did not happen.”

Common Issues Auditors Find

Asked about common mistakes he sees, Bartells tells PLANSPONSOR that using the wrong definition of compensation when calculating deferrals or employer contributions “is a big one.” According to his LinkedIn post, “This is typically caused due to the definition of compensation in the plan document being all-encompassing, such as ‘all W-2 wages.’ But the plan sponsor then incorrectly excludes certain W-2 wage items, such as bonuses or vacation payouts, from the calculation of employee deferrals or employer matching calculations.”

Bartells recommends that plan sponsors periodically revisit the definition of compensation in their plan document and that the definition of compensation should be very clearly defined.

Moore says she also sees sponsors mistakenly not following the correction definition of compensation, especially in new audits. “A company’s payroll system gets set up first; the 401(k) plan gets set up later,” she says. “Until the plan is set up, it hasn’t had to check whether it is withholding money on the correct definition of compensation. Many are mistakenly excluding bonuses.”

Bartells says continued late remittances of deferrals are also an issue. “Most plan sponsors use a payroll provider, and contributions and loan repayments are regularly remitted,” he says. “The most common situation I see is in physician groups that have different pay codes for different pay cycles. They can lose track of what should have been remitted and send money a few weeks late. Companies with complex payroll cycles need better processes and controls.”

Moore says the timeliness of depositing contributions is also an issue, again, especially in new audits. The DOL provides a seven-business-day safe harbor rule for employee contributions to plans with fewer than 100 participants. But “large plans” that require a financial audit to be filed with their Form 5500 are those with 100 or more participants. “Large plans need to get contributions deposited sooner,” Moore says. “We suggest plan sponsors take care of it when they take care of payroll tax withholding.”

Moore says one problem her firm is seeing more of this year, because there have been more conversions to new recordkeepers, is a lack of documentation about loans. “Plan sponsors rely on recordkeepers to keep documentation for loans, but when they switch service providers, they are losing that documentation, which proves those transactions were taken care of in accordance with participant requests,” she explains.

“Many plan sponsors don’t realize they are ultimately responsible for providing supporting documentation,” Moore adds. “So completely relying on recordkeepers leaves them open for issues with our audit, the DOL or IRS.”

Moore says her biggest worry about plan management is when sponsors blindly rely on recordkeepers. “It worries me when we’re doing initial inquiries with plan sponsors and their answer to everything is, ‘Oh, we don’t do that; the recordkeeper does that,’” she says. “I’d say at least 75% of the time they say the recordkeeper is doing something, it’s not. For example, some plan sponsors think their recordkeeper is sending eligibility notifications to employees, but it’s not. Sometimes they don’t think they have to keep documentation, but they should be.”

Bartells says, on a high level, what worries him about plan sponsor processes is when employers have outsourced most duties so it almost seems like the sponsors don’t take enough interest in or responsibility for the plan. “When I talk to them about what’s going on with their plan during the year, it seems like they don’t have a good feel for it,” he says. “They are ultimately responsible, and the DOL wants them to know what is going on with the plan. Some are completely withdrawn from plan activity.”

Suggestions for Plan Sponsor Processes

As part of plan sponsor processes, Moore says she stresses that clients should “make sure whatever comes out of payroll is getting deposited timely and correctly.” She recommends plan sponsors do a reconciliation at the end of each year.

In addition, “to earn a gold star,” Moore says plan sponsors should know the correct definition of eligible compensation for contributions. “At year-end, make sure contributions have been allocated correctly and look at any special pay that may have occurred—anything unique,” she says.

Other than having a retirement plan committee, Bartells suggests plans have an investment policy statement (IPS) and follow it as part of their processes. He says he would suggest that plan sponsors use an independent financial adviser to give information to the committee and do an unbiased evaluation of investments.

Bartells also says it might make sense for some plan sponsors to do their own sampling or internal audit if they’ve had audit issues in the past or have a complex plan or complex calculations for different groups. Sampling is when a percentage of participant accounts is randomly selected and checked to make sure contributions, loan repayments, distributions, etc. are correctly calculated and posted.

In his LinkedIn post, Bartells says he is “surprised by how many plan sponsors are unaware that SOC-1 reports exist.” He explains to PLANSPONSOR that auditors “rely on these a great deal.” SOC stands for “System and Organization Controls.” Bartells says if he looks at a recordkeeper’s SOC-1 report, for example, and sees it has clean controls in place, he can reduce some of the sampling.

“We find that plan sponsors don’t look at them to make sure service providers have effective controls in place to process transactions, so they don’t know if there are any issues,” Bartells says.

«