Congress may be already debating the SECURE Act 2.0, but the industry is still adapting to the landscape created by the Setting Every Community Up for Retirement Act, the first SECURE Act, which passed in late 2019.

Among the sweeping changes ushered in by the SECURE Act was the creation of pooled employer plans, in which multiple employers can join a single plan to get access to the benefits of scale afforded to larger plans. Unlike multiple employer plans, which existed previously, PEPs allow employers to join a shared retirement plan without having a common nexus, such as an industry or location. For now, PEPs are available only for 401(k) plans, not for 403(b) or 457(b) plans.

In addition to allowing smaller employers to tap into economies of scale, PEPs might also, some proponents believe, prove a viable option for larger plan sponsors that like the idea of outsourcing the fiduciary responsibilities associated with plan administration.

While an increasing number of plan providers have brought PEPs to market, their uptake thus far has been relatively slow. In 2021, a quarter of plan sponsors said they were interested in joining a PEP, but just 5% had begun the transition, according to data from Cerulli Associates.

The relatively muted response to new PEPs might reflect a learning curve, as more employers are figuring out what they are and how they work. It’s also a reflection of the many other challenges faced by small businesses in recent years.

“They were focused on keeping their doors open and making payroll; they weren’t thinking about running an ERISA worksite program,” says Ralph Ferraro, senior vice president and head of product, retirement plan services at Lincoln Financial Group. “One of the biggest catalysts of the SECURE Act was [the desire] to take that burden off of small business owners.”

Outsourcing Responsibility

A significant benefit of joining a PEP for employers is the ability to outsource some of the fiduciary liability that comes with running a plan to what the legislation calls a pooled plan provider. But the responsibility for selecting the PPP still lies with the employer. One way to make that choice is by using a request for proposals process to compare vendors and their offerings.

“The employer that wants to participate in the PEP is ultimately responsible for the selection and monitoring of the PPP, so they probably should be looking at more than one,” says David Kaleda, a Washington, D.C.-based principal at Groom Law Group, Chartered. One thing to consider, he says, is “the level of expertise that the PPP has in providing retirement plan benefits.”

While PEPs are relatively new, many vendors have been offering MEPs for years—experience that should transition well into the PEP marketplace. Employers might also want to include an RFP question about what type of support the PEP will provide in terms of onboarding and enrollment, and what the transition will look like if the employer already has an existing 401(k) plan.

PEP RFPs might be more likely to come from plan sponsors who already have a 401(k) plan and are considering switching to a PEP, rather than from small businesses considering joining a PEP as their first entrée into offering retirement benefits to their workers, says Chad Parks, founder and CEO of Ubiquity Retirement + Savings, a 401(k) provider for small businesses in San Francisco.

In either case, the selection process should make clear which roles the PPP, which serves as the plan fiduciary, will also play, and what other providers will be used by the PEP for additional services, such as investment management or recordkeeping, Parks says.

“Employers need to think about what criteria is important to them for each of the different roles within a PEP,” Ferraro says.

Considering Roles in Plan Management

Some PPPs might provide the funds for the PEP, while others have an open architecture, meaning the plan investment menu can include funds from different providers. PEPs that work with fewer providers might have lower costs, but that doesn’t mean they’re automatically the best option.

“You don’t have to pick the cheaper of the two,” Kaleda says. “But if you pick the more expensive one, you have to be able to justify why. It should be because it’s in the best interest of the participants.”

The appeal of many PEPs for plan sponsors is that the PPP might take on, or work with another vendor to provide, a 3(16) administrative fiduciary role, with responsibility for day-to-day plan management and decisions on things like participant loans and distributions. The PPP or a partner provider might take on a 3(38) investment manager role as well.

“If you’ve been doing administrator tasks yourself, and you’re moving to a 3(16), you’re going to want to make sure you understand the roles and responsibilities,” Parks says. “How will you work with that provider in terms of the workflow and the approval process? How often do you need to be in the loop or not?”

While many vendors have introduced PEPs to market, they’re still a relatively nascent product, which means that the plan sponsors might not find all the bells and whistles available from some individual 401(k) plan providers. Employers will want to look at what type of features any given PEP includes, such as the investment menu, plan design features, and financial wellness or other education-related offerings.

“They might be perceived as being a little restrictive in what they’re offering you,” Parks says. “It’s one-size-fits-most. So, if you already have a plan and provisions that you’ve chosen, you’re going to want to make sure it’s compatible with the PEP. You may need to make some changes or modernize your existing plan design.”

Employers that are looking to roll an existing plan into a PEP will also need to make sure that the transition doesn’t run afoul of the Employee Retirement Income Security Act anti-cutback rules, which prevent plan fiduciaries from moving to a plan design that offers less generous benefits than what employees had been getting.

Another question the RFP should ask is which payroll providers the PEP can integrate with. “Ideally, the PEP should have the ability to integrate with your payroll,” Parks says. “Good, clean, frequent payroll data is what will make everything successful.”

Once a plan sponsor has received RFPs from multiple providers, Parks says, they should approach the selection process as they would any other fiduciary decision: Using a measured, documented process.

As with all fiduciary decisions, cost is an important factor, but not the only one that employers should consider when selecting a PEP. Still, plan sponsors should ask about additional fees, as some PEPs might levy additional charges for services like the required annual audit, says Parks.

When making the final decision on a PPP, plan sponsors “want to make sure you’re comparing apples to apples,” Parks says. “You might need to do a spreadsheet for side-by-side comparison. If you’re in any doubt about something, ask for clarification.”

RFPs can also help employers with their fiduciary responsibility to monitor PPPs over time. Employers should keep in mind that since many PEPs are brand new, it’s possible that providers’ offerings and delivery models will evolve over time.