For many employers, outsourcing the management of their retirement plans is an attractive option. If you’re a retirement plan advisor who offers consulting services to businesses, however, you may find that many plan sponsors who outsource also want to maintain a say in oversight of their plan. With you as their guide, they want to be able to make decisions about services and providers in the best interest of their plan’s participants.
So, how do you find the right solution to meet these somewhat conflicting needs? Fortunately, there’s an efficient, streamlined option that’s firmly entrenched in the marketplace today: small market bundled solutions. Recent regulation has taken the spotlight away from this approach and directed it toward an unproven and much less flexible solution: pooled employer plans (PEPs).
Below, we look at the benefits and drawbacks of PEPs versus bundled solutions. As part of this comparison, we’ll explore how a small market bundled solution matches the efficiency features of the PEP design while offering the additional benefits of customization and a larger opportunity for you to demonstrate your value as a retirement plan advisor.
The New Ready-Made Pooled Solution
The Setting Every Community Up for Retirement Enhancement (SECURE) Act introduced the term PEP to the retirement plan vernacular. A PEP provides a way for unrelated businesses (those that don’t share a common industry or location) to pool their retirement plans into a single plan. Being “unrelated” is the key factor separating PEPs from multiple employer plans, which pool plans for related employers or groups.
A PEP’s major components are, generally, the same as those of a traditional 401(k) program, in which a third-party provider handles recordkeeping, investment management, and administration. The program is in its infancy, though, so you should keep the following considerations in mind when weighing your clients’ potential adoption of a PEP.
No history. In theory, PEPs are intended to deliver increased purchasing power and reduced costs, in comparison with traditional 401(k) service models. Nonetheless, absent any track record for PEP pricing, it’s difficult to predict whether meaningful economies of scale will be realized by plan sponsors.
Rigid approach. Due to a PEP’s one-size-fits-all model, adopting employers are likely to encounter an inflexible framework for services and features. Plan components, such as 3(38) investment fiduciary services, 3(16) administrative fiduciary services, and investment options, cannot be carved out. This reduces a plan sponsor’s ability to control plan costs. Adopting employers relinquish their ability to make decisions on behalf of their company and employees; instead, decisions are made by the PEP provider for all adopting employers.
Lack of clarity. Although the SECURE Act created a framework for PEPs, the provision’s inner workings are uncertain. As is usually the case with new government regulation, important details need to be worked out. As of this writing, the following questions linger:
Will there be a clear delineation of duties to be fulfilled by the PEP provider versus the employer?
If fiduciary and administrative transgressions or mistakes occur, where will the buck stop—with the PEP or the adopting employer?
Will PEP providers load the plans with proprietary investment options?
Given the murky PEP landscape, it’s unclear whether adopting employers will be able to work with you—their plan advisor—in the manner you’re accustomed to. If a client adopts a PEP, two questions also linger regarding your ongoing client relationships:
Will the bond of your relationship with the sponsoring employer be weakened?
Will the value you bring to retirement plan clients be watered down?
An oversight trigger. Regulatory oversight is another potential concern for small businesses. If PEPs come loaded with proprietary investment options, they may catch the watchful eye of regulatory agencies, leading to increased scrutiny. In addition, through the sheer accumulation of assets via the pooled approach, small businesses that adopt a PEP could become more of a target for audits and litigation.
Tepid interest. Employers are lukewarm on PEPs so far, most likely because there are still so many outstanding questions. The Alight 2021 Hot Topics in Retirement and Financial Wellbeing survey indicates that only 1 percent of employers are interested in joining a PEP. This could change, of course, as the PEP landscape clears, but employers are taking a wait-and-see approach for now.
The Appeal of Small Market Bundled Solutions
Fortunately, an attractive alternative to PEPs is available today. Small market bundled solutions offer a packaged mix of services, but with several important added advantages. Let’s look at how a bundled solution can benefit you and your retirement plan clients.
Operational efficiency. Services such as a 3(38) investment fiduciary, 3(16) administrative fiduciary, recordkeeping, administration, and trust services can be snapped together—usually by recordkeepers, who are accustomed to working with other services providers—to create a streamlined, ready-made retirement plan solution.
Flexibility to choose. A bundled solution often allows employers to choose the providers they wish to work with and the services they want to receive. Adding or removing a 3(38) fiduciary service, for instance, can easily be achieved. This isn’t true of the rigid PEP model.
Control of services. The vetting and recommendation of services and service providers is one of the primary functions of a retirement plan advisor. With a bundled solution, these roles remain with you. You can recommend dialing services up or down to fit the needs of your clients. This fluidity helps preserve the value you deliver to your retirement plan client relationships.
Cost levers. Recordkeepers, third-party administrators, and outsourced fiduciary services have assembled a chassis of products and services that are tested, tried and true, and don’t have to be created from scratch. Generally, recordkeepers can offer different pricing levers based on the number and depth of the services a retirement plan client chooses. This flexibility could make a bundled solution as price competitive as a PEP (if the low-cost pricing promise of PEPs comes to fruition).
Being a Trusted Guide
If you’re a retirement plan advisor who manages a corporate 401(k) plan for a small business client, it’s a good idea to compare the pros and cons of PEPs versus bundled solutions. Although a PEP might fall short in serving your client’s needs, the ready-to-go possibilities of a bundled package may provide them access to the critical services they’re looking for—and be offered through service providers you’re familiar with. This can be a win-win, enabling you to simplify their fiduciary responsibilities, while helping you solidify your position as a trusted consultant.
This material is for educational purposes only and is not intended to provide specific advice.