We can expect quite a few Pooled Employer Plans (PEPs) to be available this year, and employers interested in joining one will need to carefully assess certain essential information about the plans they are considering before signing on the dotted line, according to the American Academy of Actuaries.
The new class of workplace retirement savings vehicles was created by the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in 2019. The goal of the legislation was to increase the availability of retirement savings plans to the nearly half of American workers who don’t have access to a plan at work. Many of those workers are employed by small businesses who don’t sponsor plans due to cost, liability concerns and administrative burden.
While PEPs have promised to reduce administrative and operational burdens, the employer may have to sacrifice some flexibility in plan design and choice of service providers. Employers should ask several key questions when considering whether to join a PEP, including what the magnitude of reduction, if any, there will be in administrative costs compared to sponsoring an individual plan, said AAA.
Employers also should understand the level of investment-related expenses. The academy noted that institutionally priced investment options are currently available at low minimum balances for many index funds, so investment-related fees for those funds would be unlikely to be reduced significantly.
In addition, employers should be aware that even in a PEP, they retain some administrative responsibility for providing accurate participant data, accurately determining plan compensation and contributions, withholding proper funds, and remitting contributions in a timely manner. And finally, as fiduciaries, employers still need to monitor their Pooled Plan Provider (PPP) and other vendors.
Once an employer has decided to join a PEP, there are several considerations they should take when choosing the best plan for their needs, according to the academy. They include:
1. Investment choices. Employers should understand what investment choices will be available to plan participants and what the default fund is for employees who don’t make an election. How easy is it for participants to make investment selections and how much are fees and expenses?
2. Administrative services and fees. Employers should understand what administrative services PPPs provide and at what cost, as well as how they will coordinate with the employer’s payroll provider and other service providers. How will the PPP manage lost participants, uncashed checks, forfeiture accounts and other issues?
3. Participation features. Employers should understand what the onboarding process is for participants, whether there is a default contribution option and whether the PEP supports both pre-tax and Roth contributions.
4. Employer contributions. Employers should ask if they can make contributions and what types are available, whether matching, non-matching or both, and whether employer contributions are fixed or variable.
5. Retirement Income options. Once an employee retires, what are their options to withdraw funds, and can lifetime income products be purchased from insurers? Does the PEP allow for non-insured structured retirement income payouts and how are participants supported for required minimum distributions?
6. Long-term retirement planning. How are employees guided in planning for their retirement goals and is there a tool available that employees can use to model based on alternative assumptions such as level of future contributions, target retirement age, and investment alternatives and returns?
7. Portability. Can funds be rolled over into the PEP plan and can employees easily arrange a transfer? When an employee changes jobs, is it easy to roll funds from the PEP to another plan?
8. Retirement education. What type of education is offered to employees and how is it provided? Can it be tailored to a particular employer’s workforce and does the plan offer assistance to employees in deciding on lifetime income options, lump sums and other distribution options?
9. Retirement advice. Does the PPP offer advice to employees near retirement, who provides the advice and how is it paid for?
10. Conflicts of Interest. Are there companies or service providers affiliated with the PPP that are providing services or investment options for the PEP? What are the relationships among the PPP, recordkeepers and investment managers?
Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel. Kristen graduated from the University of Missouri with a degree in journalism.