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

To get a sense of what's in store with PEPs and what could change, it makes sense to dig into the ancestral MEPs and analyze them. That's exactly what a paper by Morningstar senior analyst Lia Mitchell and head of policy research Aron Szapiro, author and contributor respectively, does. In the process, Mitchell and Szapiro have come up with some interesting recommendations about PEPs.

This is not your father's MEP

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

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

PEPs are important, the authors agree, but they aren't going to solve the problem of getting access to retirement plans for small business employees. Barring a mandate, "many small businesses are disinclined to offer retirement benefits no matter how easy they are to set up," the authors say. Even so, they see PEPs as a way to help boost the quality of the retirement plans that smaller businesses already offer.

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

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

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

When it comes to size, they say, PEPs need to grow, and grow better than MEPs have. When a plan reaches a sweet spot of around $10 million in assets, fees are reduced by 0.277% for every percent increase in plan size, they calculate. But MEPs that are smaller than $10 million in assets have a hard time keeping fees down.

And many MEPs have stayed small.

Which doesn't seem bad on the surface. After all, a selling point of PEPs is that those with fewer than 1,000 participants will have simplified reporting requirements, thanks to the SECURE Act.

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

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

PEPs still have potential

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

1. Limit the reporting and audit relief offered to smaller PEPs if they don't get bigger. "This would make the relief a carrot for new PEPs while curbing long-term problems with plans that never scale."

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

3. Make it easy for plan sponsors to withdraw and join other PEPs, and for PEPs to merge with each other. That way, if a PEP gets larger but the fees don't go down, sponsors would have some options for action. It would also address the issue of a provider wanting to close a PEP and could help with the desired increase in scale — "if it is determined that is the best approach to creating scale."

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

Instant Insights /

What MEPs can tell us about making PEPs better tools for retirement saving

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