The open multiple-employer plans (MEPs) now called pooled employer plans (PEPs) under the recently adopted SECURE Act are the most important legislative change for defined-contribution plans since the 2006 Pension Protection Act. The question for advisers is whether they can ride the wave or be drowned, missing major opportunities and losing current clients.
In the ’90s, when DC plans started becoming common, mutual fund companies offered record-keeping services, and few advisers were involved. The focus was on funds and returns, with little interest in fees or fiduciary service.
The Pension Protection Act opened the door to using target-date funds as the default investment option for plans. But just two years later, the 2008 crash exposed the fallacy that all TDFs were created equal, and many participants who were near retirement suffered investment losses.
Savvy retirement plan advisers were already focused on outrageous plan fees and the fiduciary liability that plan sponsors faced. Business in 401(k)s became more important, not just for specialist retirement plan advisers, but also generalists who saw DC plans as a hedge – participants stayed in the market and kept contributing, courtesy of automatic payroll deductions.
RPAs shifted their focus to plan design, including automatic enrollment, auto escalation of contributions, stretch match provisions and using a balanced investment as the default.
With pension plans becoming less common and the viability of Social Security in question, DC plans or payroll-deduction retirement plans moved from being “nice to have” to a required benefit.
Yet about half of American workers do not have a DC plan or an individual retirement account, showing the current need for PEPs. Many advisers think those plans will be adopted primarily by startups and small employers. But they are wrong.
And while MEPs are required for pooled-employer organizations and available only to groups of employers that have a nexus, like associations, PEPs can be sponsored by record keepers, RIAs, broker-dealers, advisers, third-party administrators and money managers. That means employers get an expertly managed plan with institutional investments, while facing less work and liability.
What could go wrong? Who wins? And, by the law of economics, who loses?
First and foremost, participants will win. Even without considering potential cost-savings, PEPs will be professionally managed, and the ideal plan design will set participants up for success. They will get superior investments that can better weather turbulent markets. And plan sponsors can offload more of the work and liability to pooled plan providers, employing savvy advisers, or at least those who have professional oversight.
Record keepers that adopt PEPs, whether as the pooled-plan provider (PPP) or partnering with a provider like a TPA, will enjoy more efficient distribution. Some TPAs will act as a PPP, partnering with record keepers, advisers and money managers. Larger retirement plan advisers, especially aggregators, may create their own PEP, either acting as a PPP or, more likely, outsourcing to a third-party PPP under a private label. Less experienced RPAs, or those not affiliated with a DC aggregator, can use open PPPs or those sponsored by their broker-dealers. Even the proverbial blind squirrel, with just a handful of plans, will benefit by partnering with a PPP.
Who loses? And what are the pitfalls of a PEP?
The SECURE Act will not change the dynamic that plans are sold, not bought. Plan sponsors will not abandon their current provider or adviser overnight. It will take time, education and sales.
Regardless, the sale and administration of PEPs will become more efficient, leading to lower costs for record keepers, which could lead to reductions in their field forces. Similarly, smaller compliance-only TPAs that cannot or do not offer PPP services will be cut out. Finally, PEPs will make investment decisions even more centralized, leading to less interaction with advisers in the field. That will benefit those who have adopted a centralized decision-making sales strategy, offering professional managed strategies like TDFs and managed accounts. In other words, the rich get richer.
While pooled plan providers and record keepers will likely distribute through advisers, some might see an opening to go direct. New entrants like health insurance and property and casualty providers could leverage existing relationships through their brokers. Those brokers only need to introduce clients to a PEP with superior service at lower costs. Brokers will need little to no expertise or involvement, and not only will they get paid, but they will solidify the relationship.
PEPs can expose the clunky, outdated technology used by almost all record keepers, opening the door for new tech companies. It only makes sense for PEPs to have one record keeper to allow participants to easily transfer jobs and retain in-service credits – so some providers might get shut out. And managing participant data, along with privacy issues, will become more essential within a PEP, requiring new tech such as blockchain to access, serve and protect participants.
Finally, how the Department of Labor crafts the regulations will determine whether PEPs become easy to adopt without unnecessary restrictions. The government never screws things up, right?
Advisers, broker-dealers, record keepers, money managers and TPAs that get ahead of the curve, learn as much as possible and prepare a go-to-market strategy will benefit greatly. Those that do not will be become a footnote in the history of the DC market, looking back with deep regret.
Fred Barstein is founder and CEO of and The Plan Sponsor University. He is also a contributing editor for InvestmentNews’