person holding a giant telescope while standing on a giant block chart (Photo: Shutterstock)

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The defined contribution retirement plans known as PooledEmployer Plans (PEPs) came onto most people's radar with thesigning of the SECURE Act in late 2019. We should see them debutJanuary 1, 2021. Despite their relative newness, they descend froma type of plan that's been around a while — the multiple employerplan (MEP). That doesn't mean there aren't questions about PEPs. Infact, no one really knows the answers to these important ones: WillPEPs be successful? What will be the ideal number of employers inthem? the right number of participants? Will they be better thanthe options small employers have now?

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To get a sense of what's in store with PEPs and what couldchange, it makes sense to dig into the ancestral MEPs and analyzethem. That's exactly what a paper by Morningstar senior analyst Lia Mitchell andhead of policy research Aron Szapiro, author and contributorrespectively, does. In the process, Mitchell and Szapirohave come up with some interestingrecommendations about PEPs.

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This is not your father's MEP

PEPs differ from MEPs in several ways. Besides the axing ofthe  notorious "one bad apple rule" where one employer'sproblems would ruin a MEP for all employers in the plan, PEPscontain  the new "pooled plan provider" requirement. Thisis a fiduciary that runs the plan but isn't one of the employers inthe plan. The PEP also adds the position of a trustee who collectsthe plan contributions from the employers.

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The selling point of PEPs from the viewpoint of Congress wasthat they are a way to help workers get access to retirement plans.The reasoning goes that small employers might find them simpler tooffer than a traditional single-employer plan.

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PEPs are important, the authors agree, but they aren'tgoing to solve the problem of getting access to retirement plansfor small business employees. Barring a mandate, "many smallbusinesses are disinclined to offer retirement benefits no matterhow easy they are to set up," the authors say. Evenso, they see PEPs as a way to help boost the quality ofthe retirement plans that smaller businesses already offer.

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To figure out more about PEPs, they take aim at twoquestions:

  • What lessons can industry and regulators learn from MEPs?
  • What size do PEPs need to be to become competitivefee-wise?

For regulators, "be vigilant," they say, since the MEPindustry is all over the map in fee amounts. Because, they warn,"if the PEP marketplace fragments, it will not workeffectively."

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When it comes to size, they say, PEPs need to grow, and growbetter than MEPs have. When a plan reaches a sweet spot ofaround $10 million in assets, fees are reduced by 0.277% for everypercent increase in plan size, they calculate. But MEPs that aresmaller than $10 million in assets have a hard time keeping feesdown.

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And many MEPs have stayed small.

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Which doesn't seem bad on the surface. After all, a sellingpoint of PEPs is that those with fewer than 1,000 participants willhave simplified reporting requirements, thanks to the SECUREAct.

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Ironically, this simplified reporting requirement, whichcould help persuade small employers to join a PEP, "couldleave many participants in substandard plans," the paper says,because the plans would lack the oversight of auditing. Plus, itwould mean the DOL wouldn't see important data that could help itto assess plans as they grow and evolve.

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The authors are hopeful that "the PEP marketplace will grow in amore systematic way than MEPs have. However, even considering ifPEPs scale twice as quickly as MEPs, only a little more than 14% ofPEPs would reach 1,000 participants and report the detailedinformation needed to fully assess their quality in the next fiveyears," the paper says.

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PEPs still have potential

Still, the authors say, PEPs do have the potential to make smallemployer plans better, exposing participants who were in lowerquality single-employer plans to higher quality investments as partof a PEP. With that potential in mind, Mitchell and Szapirorecommend several policy changes. They include the following:

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1. Limit the reporting and audit relief offered to smaller PEPsif they don't get bigger. "This would make the relief a carrot fornew PEPs while curbing long-term problems with plans that neverscale."

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2. Make PEP providers clearly disclose administrative andinvestment fees to help make it easier for sponsors to choosebetween PEPs as well as monitor the PEP they do choose.

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3. Make it easy for plan sponsors to withdraw and join otherPEPs, and for PEPs to merge with each other. That way, if a PEPgets larger but the fees don't go down, sponsors would have someoptions for action. It would also address the issue of a providerwanting to close a PEP and could help with the desired increase inscale — "if it is determined that is the best approach to creatingscale."

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More details and arguments are examined in the paper,as is an explanation of the methodology and the numbers. Go to theMorningstar site to get "Paperwork or panacea? As PEPs Come of Age, What Can TheirForebearers Tell us About how They Will Work?"

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C.J. Marwitz

C.J. Marwitz is a writer and editor.