What is a PEP?

A PEP is also called an Open Multiple Employer Plan, or Open MEP. As that suggests, a PEP can be adopted by a number of employers and they are “open” in the sense that the employers do not need to be related. The firm that manages the PEP is called a pooled plan provider, or PPP, and is the primary fiduciary for putting together the package of services needed to operate the plan (e.g., recordkeeper and administrative services). The PPP also is the fiduciary administrator of the plan, commonly known as a 3(16) fiduciary. And, in most cases, the PPP will appoint a discretionary investment manager (also known as a 3(38) adviser) to select and monitor the PEP’s investments.

While the SECURE Act doesn’t require that PEPs have 3(38) investment managers, it does say that, if the PPP appoints a 3(38) investment adviser, the fiduciary responsibility for the selection and monitoring of the investments will be on the 3(38) and not on the adopting employers. On the other hand, if the PPP does not appoint a 3(38), the fiduciary responsibility for the investments will remain with the adopting employers. As a result, it’s expected that almost all PEPs will have a 3(38) investment adviser, who will select the investments for the PEP.

 

What are the advantages of a PEP?

If you add those duties together—selection and monitoring of providers and investments, and making all the administrative decisions—the result is that substantially all of the fiduciary responsibilities are taken off  employers and placed on the PPP and the 3(38) investment manager. That provides employers with substantial relief from fiduciary responsibility. The only fiduciary responsibility remaining on employers is the selection of the PEP and the PPP. And if the PPP is a retirement industry entity, and the providers in the PEP package are reputable, the job of selecting and monitoring the PEP should not be difficult.

That transfer of fiduciary responsibility is one of the three potential benefits of using a PEP. The second is the transfer of much of administrative work and fiduciary responsibility for the administrative decisions (e.g., participant loans, hardship withdrawals, eligibility, distributions and so on). The employer will still be responsible for providing disclosures to its employees, such as the 404a-5 Investment Comparative Chart and the Summary Plan Descriptions. SPDs (which will be prepared by the PPP); however, much of the work in delivery disclosure documents will be done under the new e-delivery rules by the PPP or the PEP recordkeeper. The third potential benefit could be lower expenses. It isn’t likely that the work of the PPP and other service providers will be less expensive, and in fact, it might be slightly more expensive. But, if a PEP accumulates enough assets, the investments could be significantly less expensive, e.g., lower cost share classes and CITs.

 

How could PEPs impact financial professionals? 

Some broker-dealers and RIA firms will likely sponsor PEPs, either acting as the PPP or hiring a PPP and serving as a provider to the PEP, as well as distributing the PEP to their employer clients. That arrangement could be a good fit for firms that have a large number of clients who are plan sponsors. In fact, it might be ideal for situations where a firm has financial professionals who aren’t experienced in working with retirement plans, but who have small employer clients who may want to set up plans.

But, that’s not to say that PEPs are only suited for financial professionals who are not familiar with the issues for setting up and operating plans. For example, an advisory firm that does a lot of work with retirement plans may want to use a PEP as a solution for its smaller clients. 

However, the potential for PEPs is not limited to small employers. Some PEPs are being designed for larger plans where the employers may want to reduce the burdens, and potential liability, of sponsoring a single employer plan.

 

In addition to RIA firms and broker-dealers, PEPs may be sponsored by recordkeepers, third party administrators, banks, and benefit consulting firms.

PEPs will probably play a significant role in the small plan market, starting with newly-formed plans.

 

Conclusion

PEPs will match up well with the needs and preferences of some employers and financial professionals, but not with others. The key is for financial professionals to evaluate the needs of their employer clients and to recommend plan arrangements that meet those needs. Where a financial professional wants to help an employer, but does not want to devote significant time to working on the plan, there will almost certainly be a PEP that will meet that employer’s needs. Similarly, where a financial professional wants to be involved in helping the employer, but in the roll of a coordinator and relationship manager, there will be PEPs that fit that situation. However, where an employer would benefit from the retirement plan knowledge and experience of a financial professional (and the employer would need or value ongoing in-person advice from the financial professional, e.g., about the plan’s investments), a single-employer plan could be the better solution.

While the jury is out on whether PEPs will be widely popular, they will probably play a significant role in the small plan market, starting with newly-formed plans. In time, though, they will likely capture some existing plans where employers want the “fiduciary-lite” protections and are willing to accept standardized features and investments. And some broker-dealers and investment advisory firms may establish PEPs as “solutions” for their financial professionals who aren’t experienced in working with plans, but who have opportunities to help employers. While less certain, some financial professionals may use PEPs for their small plan clients where the potential revenue would not support individualized hand’s-on services.

A PEP is neither a panacea nor a pariah. Instead, it is a new “tool” that financial professionals can use to match the needs of an employer with the right plan and service arrangement.