The passage of the SECURE Act continues to resonate, and something the industry has “tried forever” is finally here—the ability to cost-effectively pool retirement plans to bring better scale to small employers.
Ted Schmelzle, Senior Director of Plan Sponsor Services with Securian Financial, is following it closely, aware of the incredible benefits and potential pitfalls offered by pooled employer plans (PEPs).
What specific retirement plan issues do they address? How do fees compare with their more traditional 401(k) counterparts? How will they impact the financial professional’s book of business, and how are they implemented?
Schmelzle sat with 401(k) Specialist for an expansive interview about what retirement plan professionals want (and need) to know about PEPs, and what the company is doing in the space.
What challenges do businesses face with retirement plans, and how do PEPs solve them?
For decades, the industry has really tried to figure out how to pool plans and achieve economies of scale for disparate employers in a single plan. We’ve seen this through the years with multiple employer plans, the fall of open MEPs after some adverse guidance from the Department of Labor and, along the way, professional employer organization (PEO) plans.
The Holy Grail that was never achieved in all those situations was having disparate employers participating in a single plan; maybe having a manufacturer in Denver, a car dealership in Pensacola, and a restaurant chain in Austin all participating in the same plan. The SECURE ACT makes that possible and cures some of those ills. For instance, the “One Bad Apple Rule” is now solved via the SECURE Act and removes major impediments that held back these types of companies participating in a single plan.
Why PEPs and why now? Why all the excitement over pooled employer plans?
Everybody had rightly focused on those first two prongs—the fact that you no longer need affiliation and the One Bade Apple Rule. At Securian Financial, we’ve administered closed MEPs for many years. If you had something that could qualify through an association as a closed MEP, you got close to what we’re talking about here. That, of course, is gone, with the actual affiliation requirement now removed.
I believe it important that PEPs were achieved through an act of Congress, which is therefore hardcoded into ERISA, primarily because the DOL viewed true open MEPs in the past with a skeptical eye. The reason, I believe, could be tied to negative experiences in regulating multiple employer health and welfare arrangements (MEWA). Now, because the SECURE Act has hardcoded it, the industry has more latitude.
While most people focus on those two prongs, the most important aspect of the SECURE Act and PEPs is the advent of a brand-new entity under ERISA called the pooled plan provider.
What is the history behind the PEP structure?
The industry has tried to build a better mousetrap for pooled plans for the last 25 years. The synergies are real. Price in our space is already hypercompetitive. The margins are razor-thin, so if you can simultaneously utilize pooled plans to fully outsource administration and fiduciary responsibility to the extent allowable under the law, then you’ve got a superior solution.
It’s really important for small and midsize employers and can be applied upmarket because the impediments, the minutia, the detail that goes along with running a qualified retirement plan can transfer to the shoulders of this new entity, which is the pooled plan provider.
How does an employer or plan sponsor establish a PEP?
It’s less incumbent on employers to set up a PEP so much as to adopt into a PEP. It will be interesting to see how different carriers view this marketplace and how they tailor their offerings. Much like we see in this space today for standalone plans, you’re going to see disparate offerings by providers regarding what their PEP will include.
How will PEP fees compare with their more traditional 401(k) plan counterparts?
If I’m looking at this through a plan sponsor or financial professional lens, one of my fears is that PEPs can serve as a vehicle for further obfuscation of recordkeeping fees. I’ve always drawn the analogy of fee compression and a balloon.
While I do believe there is recordkeeping fee compression, revenue expands in other areas of the balloon. No one does this as a nonprofit offering; everybody is in it to make money. The bottom line is that when fees are compressed to a point where they are not self-sustaining relative to the cost of providing those recordkeeping services, then the margin to make up that cost and provide profit is often moved elsewhere.
Those are not always well-disclosed and represent the majority of fee and expense litigation over the last 10 to 12 years, and it’s a problem that still exists.
How do PEPs affect a financial professional or consultant’s business?
They offer a host of advantages. As a financial professional, if you’ve got a book of business where you could white label a PEP, work with an outsourced PEP and offer 3(38) investment fiduciary advice, or you’re a servicing financial professional but not rising to that level, you’re able to scale your business.
You can use PEPs to court clients in your current block or, in many instances, new clients that are looking for the utmost in fiduciary and administrative outsourcing. You can put them in a PEP and service them at scale with one investment lineup and one fiduciary review rather than many. That helps cultivate the small end of the market cost-effectively. To the extent that you have a wealth management practice, it allows you to keep wealth management clients that might be important revenue-wise even if the qualified plan is not.
It will also be necessary for practitioners and specialists to deploys PEPs from a defensive standpoint. As we’ve seen, there are already several offerings out there, many of which are averse to outside distribution. It’s no secret that, as recordkeepers grow larger, there is a move afoot to eat the entire cake themselves. Offerings through the PEP can erode financial professional value if the offering doesn’t allow or provide for synergy with outside distribution. That’s going to be something that specialists look for on a case-by-case basis, depending on the provider’s offer and orientation.
Bottom line—you may well as a specialist have a block of business, and somebody comes along singing the siren song of a PEP, and if you don’t have that available arrow in your own quiver, then your business could be at risk.
Is the PEP a complicated story to tell?
It can be complicated. It depends on the number of entities involved in the PEP, but it can be told simply and to people who aren’t in the business, like employers that are sponsoring plans with no particular expertise. The players that are sponsoring plans and don’t have any specific expertise.
Certainly, it is something that is going to be readily and easily grasped by retirement plan specialists. Much like today, they’re going to have to call balls and strikes between different providers’ offerings. One important note here is trust because in many offerings, the 3(38)-investment advisor is hired by the pooled plan provider.
It turns the ordinary structure on its ear, where each plan sponsor hires the retirement plan specialist and 3(38) fiduciaries. Via the SECURE Act, it’s the pooled plan provider that hires the 3(38), in most instances. You can structure it such that each adopting employer would do that, and some do, but it then doesn’t provide for full fiduciary outsourcing.
As professionals think about who they’re going to work with and the orientation of those different offerings, trust and experience with all the things we’ve talked about is incredibly informative.
Do you have a sense of the size of the PEP market? Will it explode, or is it overblown?
The industry has longed for this solution for some time. To the extent that the primary impediments are removed, I do think we’ve got a better mousetrap.
What it means from a business standpoint remains to be seen. This will be a year to discern and digest various companies’ offerings to get a firm footing in the marketplace about who’s doing what and for what price.
In the near term, you’re going to see PEPs take hold and prosper. Whether or not they capture a statistically significant portion of the smaller market or to the extent they move upmarket is the real question. Personally, I think that they’re going to be a meaningful piece of the industry in a two-to-five-year timeframe.
What does Securian Financial do better than the other available offerings?
We view this as, first and foremost, administrative and fiduciary outsourcing. It’s a model that does not compromise on service and does so at a competitive price. We are bringing our ordinary orientation of service first and exceptional customer experiences to the marketplace.
We’re also looking to partner team up retirement plan specialists that have those in their sights. Finally, our recordkeeping fees stand on their own and are not subsidized by ancillary revenue.
We are definitely getting into the pooled employer plan space and will be a pooled plan provider. We expect to have multiple PEPs either white-labeled in the name of retirement plan specialist firms or otherwise allow us to tap into this market and meet this need.
This information is a general communication for informational and educational purposes. The materials and the information are not designed, or intended, to be applicable to any person’s individual circumstances. It should not be considered investment advice, nor does it constitute a recommendation that anyone engage in (or refrain from) a particular course of action. If you are seeking investment advice or recommendations, please contact your financial professional.
Securian Financial’s qualified retirement plan products are offered through a group variable annuity contract issued by Minnesota Life Insurance Company.
Securian Financial is the marketing name for Securian Financial Group, Inc., and its affiliates. Minnesota Life Insurance Company is an affiliate of Securian Financial Group, Inc.