Public policy advocates and market practitioners believe Pooled Employer Plans (PEP) could be instrumental to helping close the retirement plan “coverage gap” by enabling small business owners to achieve costs savings through economies of scale and offload some of the administrative burdens associated with offering a standalone retirement plan.
For providers, PEPs may represent an opportunity to achieve a stronger presence in the small plan market, according to a Cerulli report, U.S. Retirement Markets 2020: Exploring Opportunities in the Small Plan Market.
It finds one-quarter (26%) of 401(k) plan sponsors indicate they are at least somewhat interested in joining a PEP. Although many industry stakeholders, including the Department of Labor (DOL), suggest PEPs are well suited for smaller entities, plan sponsors with less than $5 million in assets exhibit less interest than plan sponsors in other asset segments—and more than one-third (36%) of plan sponsors in this “micro” segment indicate they have no opinion on the topic.
“This may be the sign of a knowledge gap related to PEPs in the lower end of the market,” Shawn O’Brien, a senior analyst with Cerulli, said in a statement. “When addressing smaller employers, more educational discussions related to the costs and benefits of PEPs may be in order.”
PEP interest
Recordkeepers, advisors, and asset managers also exhibit varying levels of interest in PEP opportunities—some have already announced plans to launch a PEP in 2021 while others are taking a “wait and see” approach to PEP opportunities.
For instance, Cerulli finds only 17% of defined contribution (DC) recordkeepers are actively pursuing PEP business and plan to act as a pooled plan provider (PPP), while 39% indicate they would consider participating in the PEP market if approached by an advisor or consultant.
Of the advisors who plan to offer a PEP, the majority expect to target “micro” and “small” plans with $25 million or less in plan assets. Providers targeting these smaller asset segments may also look to gain adoption from employers without an existing workplace retirement plan. For these employers, Cerulli suggests PEPs will be “sold, not bought.”
As recordkeepers, asset managers, third-party administrators (TPAs), and intermediaries navigate PEP opportunities, configuring an effective service model will be crucial. Cerulli believes the flexibility around the type of individual or entity that may serve as a PPP, along with the range of fiduciary responsibilities involved in operating a PEP, could lead to a variety of models.
“Providers considering the role of PPP need to be aware of the 3(16) fiduciary responsibilities involved,” O’Brien added. “Recordkeepers and TPAs are seemingly a natural fit for this role.”
PEPs aside, other providers have launched bundled solutions geared toward smaller plans to broaden their market presence and create new product distribution opportunities. Providers seeking to gain adoption in the small plan market must contend with the unique demands and constraints of small business employers and grasp the competitive differentiators specific to this market segment.
Cerulli asserts developing a simple, cost-conscious, easy-to-onboard 401(k) solution is merely the first step to succeeding in the small plan market. Providers will also need to guide plan sponsors through some of the challenges associated with administering a retirement plan.
“It’s important to remember small businesses often lack the benefits personnel and investment committees often housed within larger organizations,” O’Brien concluded. “Smaller plan sponsor clients aren’t necessarily looking for a best-of-breed custom target-date fund or a robust financial wellness program. Rather, they want a provider that can support them through the administrative challenges of offering a retirement plan.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
