Small Employers Are Showing Interest in PEPs

More than half of smaller employers say they are interested in learning more about PEPs, according to new data from the LIMRA Secure Retirement Institute.

Deb Dupont, assistant vice president, worksite retirement at the Secure Retirement Institute, says employers that are already offering retirement benefits are showing more interest in PEPs. 

“Ironically, when there’s already a plan in place, we see smaller employers having a higher interest in PEPs than those employers who don’t already have one. But interest in starting a plan is lukewarm at best among non-plan sponsor employers to begin with. The small employers who do have a plan—presumably a standalone—may be drawn to streamlined administration and the lure of lower costs and liability. It remains to be seen whether SECURE 2.0’s attempts at easing the burden for small employers in offering a plan will spike more interest in both standalones and PEPs,” says Dupont referencing pending federal retirement reform legislation. 

Overall, interest has increased from Q4 2020, explains Terrance Power, president of pooled plan provider The Platinum 401k, who is not affiliated with the research. 

“[W]e have seen the interest in pooled employer plans from plan sponsors increase significantly,” he says.

Pooled employer plans were created by the 2019 Setting Every Community Up for Retirement Act to allow unrelated employers to convene to participate in a single 401(k) plan sponsored by a registered pooled plan provider. The goal of provisions in the bill was to encourage employers that didn’t provide retirement plans to their employees to offer one.

Plan sponsors and retirement plan advisers with clients offering an existing retirement benefit may have wanted to understand how PEPs worked in practice and how PEPs could benefit the plan sponsor and retirement plan participants before joining, according to Power. 

“These same plan sponsors are reviewing the options available to them to determine which PEP would best suit their company’s plan and participants,” he says.

In 2020, a handful of PEPs were established, Power explained, and the number has increased since. He pegged the number of PEPs established—based on Department of Labor registration site figures—at 233.

“The sweet spot for employers in most pooled employer plans appears to be plan sponsors who are subject to an annual plan audit as part of their Form 5500 filing,” says Power. “There can be a significant cost savings available to the company as well as a dramatic fiduciary liability offload. Our typical adopting employer has around 150 employees and $5 million in current plan assets,” although some larger companies with plan assets approaching $100 million are also showing interest.

PEP-ing the Market

The SRI researchers asked plan sponsors to rate their interest in PEPs. Among the largest small employers—with 50-99 employees—52% are somewhat interested and 38% are very interested in PEPs, the research shows. For employers with 20-49 employees, 52% are somewhat interested and 34% are very interested.

Prior to the SECURE Act, four in 10 employers with fewer than 100 employees offered retirement benefits, the data show.

“While small employers without current retirement plans are interested in exploring PEPs, few expressed interest in adding them,” says SRI’s Dupont.

Among the smallest employers, with two to nine employees, 44% are somewhat interested and 14% are very interested, while 47% of employers with 10-19 employees are somewhat interested and 33% are very interested.

LIMRA found that the reasons for lack of interest are consistent across employer sizes up to 99 employees. Small employers that have avoided moving to a PEP have expressed concerns about lower levels of support for the companies participating in the PEP (42%) or lower levels of service for employees (39%). Almost 40% cited wanting to retain control of plan design decisions, and 33% of employers are not convinced that joining a PEP would lower plan costs.

The top reasons for small plan sponsors’ interest in PEPs were cost (52%), reduced administrative responsibility (35%) and reduced plan sponsor legal liability (32%).

“Lower cost is the most compelling reason employers would choose a PEP, but other reasons may combine to create a powerful value proposition for this new construct,” says Dupont. “The attraction of a PEP is similar, whether employers currently do or do not have a DC plan in place. For both, cost is most compelling, but reducing administrative responsibilities also has a stronger appeal for employers that currently manage administrative responsibilities of an existing plan.”

While joining a PEP does allow shared fiduciary responsibility, joining a PEP does not completely absolve plan sponsors of the fiduciary duty to retirement plan participants. “One important thing to consider is how much fiduciary responsibility does the specific PEP that they’re looking at allow them to offload,” explains Catherine Reilly, director of retirement solutions at Smart, a global retirement technology business. 

One reason small business plan sponsors are pondering PEPs is because offering a retirement plan can be a recruitment and retention tool, especially as the labor market has changed since the start of the pandemic. Due to lower unemployment and increased job growth, 67% of small business owners are currently experiencing a staffing shortage, according to a March 2022 survey from the National Federation of Independent Businesses. And according to Lincoln Financial Group’s Small Business Owner Survey, 80% of small business owners view employee benefits as a top priority because of the pandemic, 93% have reevaluated their strategy and plan to make changes due to COVID-19 and 28% of owners have bolstered benefits—including retirement plans.