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Pension Pontifications | Q2 2020

DWC 06/25/20


Get ready for the “PEP as panacea” pitch to the small plan marketplace (think low cost, highest quality services, coolest technology, least risk, etc.).  We’ve already seen one promoter using the coronavirus situation as a PEP sales tool.

- As originally published in our Q2 2020 newsletter. Didn't get it? Sign up here.

Even though PEPs are a new invention, the underlying sales approach has not changed in the last 30 years; the message now is just a new flavor. To be fair, technology did not become a factor in the sales message until our industry offered interactive voice response for participants to hear their balances and initiate a few transactions over the phone.

Is a PEP the best solution for a plan sponsor? The easiest way to answer this question is with a question. Can a plan sponsor receive the lowest cost, highest quality service, coolest technology, and least risk with a stand alone plan? That answer is yes...with one caveat. It is virtually impossible to receive the highest quality service at the lowest cost – that holds true for any type of business. Always beware of that sales message!

To take the question to the next level, the overall price comparison of a PEP versus stand alone will be close – potentially lower for a stand-alone plan if you take the time to perform the proper due diligence and get to know the best fit service providers (investment advisors, recordkeepers, and TPAs). Although one would argue proper due diligence is a no-brainer, it is often discarded in the small plan marketplace as the decision-makers at the company want to rely on their investment advisors to make the process easy. The emphasis is to keep the costs low and make sure the solution is easy to administer.  The pooling of assets and participants is often touted as being the critical factor in driving down pricing for everyone that is part of the plan.  However, it is not a foregone conclusion that fees in a MEP/PEP won’t be excessive.  There are several excessive-fee lawsuits pending against the sponsor of an open multiple employer plan that has almost $4.5 billion in assets.

Where do PEPs make sense?  There are several areas where they might:

  • Large plan filers: Plans with more than 100 participants must engage a CPA to audit the financials each year.  Several large plan filers could join the same PEP and share the cost of the audit.  However, if properly done, the audit of a MEP/PEP is typically much more expensive as it must include a review of the plan-related internal controls in place at each adopting employer.
  • Investment advisory firms: These firms can create their own PEPs for their clients to facilitate streamlined management of the investment menu as well as quarterly reporting to help reduce fees.  Note that an advisory firm does not have to take on the role of Pooled Plan Provider (the party responsible for managing the entire plan.  They can outsource that role.  For example, DWC can be the PPP for the XYZ Investment Advisor PEP.
  • Large asset pool: The more significant the assets in the PEP, the greater the potential bargaining power on investment management fees.  However, as we noted above, there is no guarantee that that bargaining power will be fully utilized.
  • Startup plans: Implementation and set-up for first time plans can be streamlined.  This could also be enticing for companies that are moving from a SEP or SIMPLE to a 401(k) plan.

Plan sponsors that decide to join a PEP will have no input on the investment menu, and it is probable the communication materials for participants will not be as customized as compared to a stand alone solution.  Similar to what we have seen in PEP-esque solutions in the past, plan design options are also likely to be significantly limited with only a handful of provisions available for customization.  Though DWC will definitely be a part of the PEP landscape as we move into 2020, as of this writing, we expect a majority of our new business will continue to be in a stand alone model.

One other thing to note.  If you hear anyone claiming to already have a PEP solution or to already be a Pooled Plan Provider, consider easing toward the exit.  Not only are the new PEP rules not effective until January 1, 2021, but there is also no way anyone can be a PPP yet.  The reason is that firms must register with the government (presumably the Department of Labor) to be a PPP, and that registration process has not yet been rolled out.

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The views expressed in this blog are those of the authors and do not necessarily represent the views of any other person or organization. All content is provided for informational purposes only and is not intended to be tax or legal advice.