It’s been nearly a year and a half since 401k PEPs came into existence. They came with much fanfare. It came with much anticipation. It came with years’ long yearning.

But what came of it? So far, after some initial activity, it’s been a whole lot of crickets. Sure, there have been a lot of questions, but has there been anything beyond that?

“In the last year, we have had more and more inquiries by PEP sponsors regarding bonding, fiduciary and cyber insurance,” says Michael Bonfante, Business Development Manager at Colonial Surety in Woodcliff Lake, New Jersey, “however, we do not have first-hand the statistics on the growth rate of PEPs.”

Perhaps, in all the excitement, people forgot the normal gestation period involved with 401k plans.

“PEPs are still in the infancy stage as the market digests the idea and products are being built,” says Daniel Cahill, Head of Defined Contribution Client Engagement, and Senior Vice President at Partners Group in New York City. “The idea of pooling plans that have no affiliation is disruptive to all parties – plan sponsors, record keepers, consultants, and asset managers – so it will take additional time for mass embrace in the US market like it has in the UK and Australia.”

The ability to reduce costs by commingling plan assets from different companies’ plans has been by far the largest perceived attraction regarding MEPs in and past and PEPs in the future.

“Many believed that PEPs would offer significant cost efficiencies to small business owners, but that has not been my experience after reviewing quotes from multiple vendors,” says Matthew Zokai, Director, Retirement Solutions at Avantax Wealth Management in Dallas, Texas. “They certainly have the ability to provide a turnkey solution while minimizing the fiduciary responsibility of the business owner, but the costs are very much in line with establishing a standalone plan.”

It may be that while Congress fiddled for years, the industry may have found ways to streamline itself, reducing the overall weight of this attraction.

“This legislation came a little too late,” says Stefan Mihaylov, CEO of MyVal Center in San Francisco, California. “Large vendors have already learned how to benefit from economies of scale and lower the cost of single-employer plans. We are a small company that has had a 401k plan with Fidelity for over a decade. We pay $145 per month per participant and we get an incredibly long and diverse list of investment options. Why would we switch to a pooled plan?”

Mihaylov’s experience calls into question the popular premise for PEPs.

“Pooled employer plans, whether an MEP or a PEP, generally derive their greatest marketable value through economies of scale,” says Dan Beck, Co-Founder & CEO at 401GO in Sandy, Utah. “They have been offered and marketed as a lower cost and lower friction option for small to medium-sized businesses that aren’t willing to set up their 401k. The PEP was just the industry’s best attempt at providing something slightly better for these SMBs. However, with the recent introduction of fintech solutions and others, technology and automation have proven far more effective at delivering value than the economies of scale of pooled plans. The industry created a derivative of an existing solution. At the same time, fintech providers took a different approach and built an entirely new solution for the SMB market – the fintech providers seem to have been correct.”

Still, even with lower fees, there appear to be other reasons why we haven’t seen the explosion of PEPs as many expected.

“It seems that fees are not the primary factor in determining whether or not small businesses want to set up a retirement plan for their employees,” says Sean McGarry, First Vice President/Retirement Plan Services Manager at Rockland Trust in Somerset, Massachusetts. “There are still many small businesses where employees would prefer other employee benefits more than retirement plans. Small business owners are also a root cause of the slow adoption rate because they don’t have the time to dedicate towards setting the plan up and introducing it to employees, and then working with payroll and other vendors to make sure the plan operates smoothly over time.”

Maybe it’s just the whole premise of PEPs that isn’t causing many heads to turn.

“One size plan does not fit all companies,” says Charles Rosenberg, VP of Intac FuturePlan in Woodcliff Lake, New Jersey. “Plan sponsors want more customization and direction for what is appropriate for them.”

Beyond PEPs themselves, other demographic factors may be producing obstacles to adoption.

“Higher turnover of employees in recent years going to retirement, qualified employees going to the competition, or families consolidating incomes to have a stay-at-home parent,” says Andrew Gold, a Financial Advisor/Investment Strategist at Prestige Wealth Management in Southlake, Texas. “Younger employees are having a hard time with inflation costs and are really questioning the value of investing in 401ks. A growing number of people are quitting their corporate job to try entrepreneurship by starting their own business or moving their assets to Self-directed IRA’s to be able to invest in single-family homes as rentals.”

Additionally, there’s a fear that those rushing to promote their own PEPs are merely trying to return to the bundle service provider environment the industry evolved away from more than a decade ago. This makes due diligence all the more important.

“The lower profits of PEPs provide a disincentive to financial firms to promote them,” says Joe Merrill, General Partner at Sputnik ATX in Austin, Texas. “There is an inherent conflict between traditional 401k providers, participants, and plan sponsors. The lower margins make PEP education and marketing less well-known due to smaller budgets. However, the fiduciary rules introduced by Congress make pleading ignorance no excuse. Plan Sponsors need to start looking hard at offerings as viable solutions.”




A sober analysis should lead one to the conclusion that it may be too early to assess the impact of the new PEP opportunity.

“The SECURE Act allowed PEPs to formulate starting in 2021, but they are still in their infancy, and advisors and consultants are working to better understand the associated cost savings opportunities, risk mitigation, and day-to-day work efficiencies and ultimately how they can be valuable to their clients,” says Scott Moulton, a financial advisor with Equitable Advisors in Milford, Connecticut, who adds, “Some plan sponsors prefer the customization that comes with having their own plan, outside of a PEP.”

Not only is the lead time involved in moving 401k plans long, but, for all but a few, the PEP infrastructure is still a work in progress.

“While I can’t speak to the growth rate that other industry professionals may have expected for 401k PEPs, it does not surprise me if some feel that the establishment and growth of PEPs haven’t advanced as quickly as some had anticipated,” says Phil Maffei, managing director, corporate income retirement products, TIAA, Charlotte, North Carolina. “The Defined Contribution (DC) plan industry is not one that adopts change quickly. There are many factors to consider in advance of making plan changes, investment changes, and recordkeeper changes. Then there are committees that need to ratify recommended changes. Plans then often need to work with recordkeepers or other service providers to get in the queue to implement changes and then participants need to have education and communications. To the outside world, these processes can seem like they take long, but it’s about par for the course inside the DC space. I am bullish on PEPs, and like plan sponsor adoption of lifetime income solutions, I think there will be acceleration as we look out over the next 2 to 3 years.”

Furthermore, it’s clear that not all PEP providers are the same, and there is only now a growing sense of how to evaluate them. Once this consensus becomes clearer, maybe we’ll begin to see an acceleration towards these relatively new pooling vehicles.

“To be fair, PEPs only came into being in January of 2021 and implementation was no easy task,” says Jim Pratt-Heaney, Founding Partner of Coastal Bridge Advisors in Westport, Connecticut. “The PEPs that have emerged the fastest came from the usual suspects who were designing plans that continue to offer less transparent and often conflicted investment products. Furthermore, we’ve seen that many of these firms still avoid fiduciary duty by outsourcing such responsibilities to third parties; when they do act as fiduciaries there are conditions (e.g., Fidelity offers a PEP but only to start-up plans, not to their existing ones). Also, independent PEPs that have been formed by fiduciary registered investment advisory firms have taken a longer time to establish themselves and achieve scale. From what we see, these types of PEPs are really starting to gain traction because of their combination of increased benefits, lower cost, and risk mitigation.”

Cahill says, “At this point, plan sponsors don’t yet understand the concept given the lack of products in the market, but that is changing rapidly. Plan sponsors should be seeking PEPs, as PEPs are the government’s solution to making retirement savings more accessible and affordable. Most importantly, plan sponsors should strongly consider a PEP due to the ability to outsource most fiduciary liability to the PPP. Until the market understands the opportunity at hand, adoption won’t grow at the expected pace.”

It makes sense to take a look at those firms experienced in the MEP business who have successfully transitioned to the PEP model. They may represent what the future portends.

Christopher Carosa is an award-winning online news producer and journalist. A dynamic speaker, he’s the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on TwitterFacebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtlantic, and Midwestern regions of the United States and in the Toronto region of Canada.

This content was originally published here.

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