In PEPs, Attaining Economy of Scale Is Critical, Sometimes Illusive

Retirement plans that include multiple employers have continued to grow in assets, but the growth of assets necessary to reach the critical size where economies of scale can be achieved may take years. The  forecasted cost savings to plan sponsors of joining a pooled employer plan over using a single employer plan may not materialize, depending on the sponsor’s pooled plan provider.

Pooled employer plans were created by the Setting Every Community Up for Retirement Enhancement Act of 2019 and came into effect in January 2021 to provide an alternative for sponsors to a single-employer plan and are a less restrictive subgroup of multiple employer plans.

Expanding MEPs to create PEPs was billed as a cost-efficient and less burdensome way for employers to provide a retirement plan, moving the needle to narrow the retirement coverage gap.  

“If you can get the economy of scale where you’re running your PEP efficiently, you can drive costs down,” says Kevin Gaston, director of plan design and institutional consulting at Vestwell. Gaston claims, single-plan sponsors “don’t ever get that scale.”  

Large plans not only have lower average costsper participant but the range of costs across plans is also lower, finds the Investment Company Institute and Brightscope.   

Vestwell is registered with the DOL to offer MEPs, including PEPs. Vestwell representatives did not disclose its assets in MEPs. 

Pooled plan providers must register with the Department of Labor and to date 149 have launched, according to the latest data shows. Among registered PPPs, 121 have at least one registered PEP and 427 total PEPs have registered with the regulator, says Robb Smith, president of RS Fiduciary Solutions, PEP-HUB and PEP-RFP. His company tracks PEP registration on the DOL’s EFAST website with the latest data.

PEPs and Retirement Coverage

Joining a PEP allows a group of participating retirement plan sponsors to join a single plan administered by a pooled plan provider, which becomes the named fiduciary responsible for performing most administrative functions for the plan.

For sponsors, joining a PEP “is less work, less risk and better outcomes…due to the economies of scale and the cost savings and we’ve seen that play out,” explains Rick Jones, a senior partner at Aon and head of its wealth solutions division.

“The cost savings that we can drive through the economies of scale and the purchasing power that Aon has in the markets generally means that more money stays in participants accounts rather than being paid in fees and grows for retirement,” explains Jones. “Different employers are attracted to different degrees to all three of those depending on where they’re coming from but they are finding that they’re having to do a lot less work to provide a customized and comprehensive 401(k) program.”

Aon plc is a registered PPP and sponsors a PEP. Aon partnered with Voya to provide recordkeeping services to support PEP sponsors. Aon’s PEP comprised nearly 80 employers, 70,000 eligible employees and $2.3 billion in participant retirement assets, as of the most recent data from Aon.

Aon’s PEP is available to sponsors with 100 employees or more.

Voya serves as a recordkeeper for approximately $90 billion overall in assets within its multiple employer solutions book of business, explains Ginger Brennan, head of multiple employer solutions at Voya.

Effect to Small Businesses

For PEP-participating sponsors, the economies of scale are critical to them realizing cost savings. And the savings are not a given.

At Aon “we were able to offer the buying power and the economies of scale that Aon investments had more broadly, on day one when we launched: Not every organization can do that or say that” Jones adds.

Cost savings may take some time to materialize as new PEPs must reach a significant size, the Center for Retirement Research at Boston College research notes.

Small employers with fewer than 100 employees account for the majority of U.S. businesses and 35% of private sector workers, according to the Bureau of Labor Statistics. About half of small employers offer a retirement plan, compared to about 90% of employers with more than 100 workers, finds the Center for Retirement Research.  

Surveys of small employers show that the two top reasons small firms do not offer a retirement plan are revenue concerns and administrative burden, found the Center for Retirement Research. Some firms may be too small or too new to offer a retirement plan. Among companies that are established enough but may be concerned about costs and administrative burden, PEPs may be able to help, wrote Anqi Chen and Alicia Munnell, authors of the Center for Retirement Research January 2024 report, A Multiple Employer Plans Primer: Exploring Their Potential to Close the Coverage Gap.

But the plans have not had enormous success. 

And efforts alongside SECURE 2.0 and prior to it outside of PEPs, which have aimed to facilitate small business to provide retirement plans have not shown great success, either.

Small business were largely unaware of tax credits available to small employers as a result of SECURE 2.0, finds a survey published by the Employe Benefit Retirement Institute, earlier this year and 24% of employers surveyed in 2022 by ShareBuilder 401k believed 401(k) plans were too costly for their businesses. As a result of lawmakers in Colorado and Oregon passing state auto-IRA mandates, more small business in those states have started to offer 401(k) plans, according to research published in December. 

PEP: Buyer Beware

Key to the success of Aon’s PEP was the company’s ability to take advantage of the size of its overall business — and assets under management — outside the PEP, adds Rick Jones.

“We launched with zero and the first couple entrants were smaller and had millions of dollars as opposed to 10s of millions or hundreds of million dollars of 401(k) assets,” says Jones. “At that point, we were leveraging the purchasing power of Aon investments and we were able to go to leading investment managers and say we’re putting together this PEP help us to devise an investment lineup at costs that are incredibly market competitive and they did just that.”

For sponsors with fewer than 100 employees to achieve lower fees, attain the in a PEP they must select the right PPP provider, Jones says.

“We find that when we price things out and do a side-by-side benchmarking that we generate and are projected to generate cost savings 90% plus of the time,” Jones says. “We are also using the purchasing power of Aon investments and the trillions of dollars of assets under advisement that we have in-house already and the hundreds of billions of dollars of assets under management [at Aon}. We find that the benchmark fees for investment options in [the] Aon PEP are 50%, lower than the benchmarks in the broader industry, again, because of the purchasing power we can offer.”

USI Consulting Group works with sponsors, consulting on their retirement plans to find the appropriate fit.

A USI Consulting Group sponsor client with about $20 million in plan assets joined a PEP but were unhappy. They moved to a single plan and realized cost savings, he explains.

“The fees decreased by about 66% or so, because they were, frankly, a bit too big to be participating in the PEP that they had joined, prior to our engagement with this client,” he says.

For sponsors, joining a PEP can add value in cost savings for “both recordkeeping and administrative services,” but not for every sponsor, he adds.

But sponsors have concerns, about restrictive plan designs and inflexibility in a pooled plan.  

Sponsors joining a PEP are “using a plan document that does not allow for the same level of customization as you can achieve in an individually designed plan document or prototype plan document,” says Lamendola. “For a lot of plan sponsors, that might be okay: They might be looking for something that’s a little bit more vanilla, they’re not looking for something that has much complexity, but many plan sponsors are looking for more flexibility than they can achieve in a PEP and therefore they’re employer route.”

“Depending on the size of a plan that is moving into a PEP or MEP, savings can potentially be realized by remaining as a stand-alone plan—even when taking additional audit fees into account.”

Preset investment lineups can exemplify the experience of sponsors joining a PEP, says Vestwell’s Gaston.

For sponsors PEPS [are] “like using [the meal-prep delivery service] HelloFresh, [because] everything comes to your door, everything’s already exactly what you need and that’s great for a lot of sponsors,” he says. “On the flip side, the more you need your individual things—maybe you have allergies, maybe you have choices that are different—then [sponsors may] start looking towards whether you’re going to be a single employer plan.”

Eric Droblyen, CEO and president of Employee Fiduciary, a third-party administrator, says the firm does not “get a lot of interest from employers,” in joining PEPs.

“Nobody’s saying, ‘Hey, I’d love to pool my assets with a bunch of other small employers, but we have advisers that that will ask,” he says. [For sponsors], it made sense 15 or 20 years ago, when plans needed lots of assets to access low-cost investments, but index funds have made that whole argument moot.”