PEPs Promise to Expand Market for 401(k) Plans
Amidst the ongoing partisanship in Washington, DC, it can be easy to forget that there’s one thing both parties have been able to agree upon: expanding retirement savings opportunities for more Americans.
The latest bill proposed by the House Ways & Means Committee is aiming to do just that. No matter what, it seems as though Democrats and Republicans will come to agreement on some form of the proposed legislation. Although some believe that may happen during the lame-duck session, it’s more realistic to expect legislation to move forward in 2021. Which means we have to wait until 2022 or 2023 to see significant new opportunities in retirement saving, right?
Maybe not! The SECURE Act — that is, the Setting Every Community Up for Retirement Enhancement — was signed into law in December 2019. Most provisions in the law become effective January 1, 2020. The Act allows for pooled employer plans (PEPs) to be created as of January 1, 2021.
What Are PEPs?
You may have heard of multiple employer plans (MEPs). In MEPs, participating employers have what’s called a “common nexus,” such as being part of the same industry. Setting up a 401(k) through a MEP gives smaller businesses the ability to band together and achieve economies of scale in operating and administering a retirement plan.
The biggest difference between MEPs and PEPs (also referred to as “open MEPs”) is that employers who are part of a PEP don’t need to share a common nexus. Which makes them more attractive for employers to sponsor — and why I’m going to focus on PEPs for the rest of this post.
In PEPs, primary fiduciary responsibility resides with a pooled plan provider (PPP).
Getting Rid of the “One Bad Apple” Rule
The SECURE Act also did away with the so-called “one bad apple” rule. Which means that if one company in the PEP fails to stay in compliance with the plan’s requirements, it doesn’t “spoil” or disqualify the entire PEP. This relief further enhanced the appeal of PEPs.
Latest Developments
The Department of Labor recently issued its final rule on PEP registration, which makes it possible for PEPs to start operating on January 1, 2021. While a PPP must register a PEP with the Secretaries of Labor and Treasury 30 days prior to startup, this requirement is waived between November 25, 2020 and January 31, 2021, provided that registration happens no later than 30 days after the plan starts operating. The DOL is also streamlining the registration process through a new electronic filing system. PEPs are set and ready to go!
Will PEPs Be Popular?
Expanding retirement saving opportunities. Economies of scale. Centralizing fiduciary responsibilities. No more proverbial single bad apples spoiling the entire bunch. What’s not to like about PEPs?
Unfortunately, at this time, the answer is “we don’t know.” Or, more accurately — according to research by Cerulli Associates for the SPARK Institute — it seems that micro- to mid-sized retirement plan sponsors aren’t expressing strong interest in PEPs … yet.
This doesn’t surprise me, given that PEPs are new and many small- to mid-size businesses have had plenty of other issues to contend with this year, rather than think about whether or not a new kind of retirement plan makes sense for them.
But as retirement service providers start introducing PEPs and successful PEPs are implemented that help create more cost-effective plans for smaller businesses, acceptance is bound to grow.
What's Next?
This would be a good time to assess your capabilities and prepare for this opportunity from both a product and distribution perspective.
For example, should you build and/or seek partnerships? What type of innovations do we see on the horizon? How can you differentiate your offering in a crowded market?
Princeton Financial Consultants can help you size the opportunity for your firm, design the strategy, and help you plan your product roadmap.
Contact us for a personalized consultation today.
