Employers Want Federal Pooled 401(k) Conflict Protections (1)

The US Labor Department backed off its plan to scrap two longstanding workplace retirement plan rules it called unnecessary after pushback from the US Chamber of Commerce and other business groups.

The DOL’s Employee Benefits Security Administration will withdraw both direct final rules “due to the receipt of significant adverse comments,” the agency said Monday. The rules, which delineated control of transitional assets under an insurer’s guaranteed benefit policy and exempted employers for annuity provider selections, will remain in effect.

The agency asked industry participants for comments late last month as it preps a report to Congress on the success of its new pooled employer plan initiative allowing groups of disparate companies to join forces under a single 401(k).

Tucked inside that information gathering request was interpretive guidance to employers joining PEPs reminding them that they can offload some of their investment oversight responsibility to pooled plan providers that appoint a co-fiduciary to manage plan assets.

It’s a clear first attempt by the government’s private-sector benefits cop to ensure pooled plans deliver on Congress’ mission to create a cheaper, easier solution for delivering defined-contribution retirement benefits to American workers and retirees. Now that the agency has begun drawing the outline of a compliant pooled employer plan, benefits advisers are calling for EBSA to issue a safe harbor completing that picture and shielding PEP employers from federal benefits litigation.

“PEPs are all over the map right now,” said David Kirchner, a principal in the Benefits Consulting Group at Ropes & Gray LLP in San Francisco. “Some of these providers are really good; they’re setting the bar for how things should look, and there are some PEPs that aren’t. It’s the wild west out there.”

The DOL has said it’s working on a legal carve-out that would encourage more PEP plan participation, but it’s unclear if it will address the conflict-of-interest concerns employers have.

That makes the request for information the government issued all the more vital, benefits advisers said.

Investment Oversight

A diverse array of plan providers flooded the market after PEPs first came online in 2021 offering a range of benefits with varying levels of operational complexity and individual employer liability.

At the end of 2023, there were 142 pooled plan providers, according to DOL data. The number of plans is likely higher, as many providers operate multiple plans.

A dozen PEPs hold roughly 70% of all assets under management. The largest PEP represents 63 employers covering 56,000 participants, whereas the second largest plan serves 33,773 employers and around 538,000 employees.

Roughly 618,000 employees participate in a pooled 401(k), the DOL said.

EBSA’s July 28 guidance appeared intent on steering employers away from pooled plan providers that take advantage of their clients’ unequal bargaining power in contract negotiations to avoid investment management oversight duties and the legal exposure that comes with them.

The Employee Retirement Income Security Act straps employer plan decisionmakers with strict fiduciary duties to put participant and beneficiary interests above their own. The consequence for mismanaging assets can mean costly, sometimes personal liability many market participants are eager to avoid.

Yet, often, employers already believe their pooled plan provider is responsible for investment management because of the way most single-employer 401(k)s are designed, an EBSA official told Bloomberg Law.

The guidance was designed to illustrate a PEP provider model in which the delegation of those duties is fully exercised resulting in very little individual exposure to liability. That model is already well represented in the market, the official added.

Safe Harbor

Now that EBSA is on the record with its views about who should take on PEP investment oversight, benefits advisers like Kirchner believe there’s more to be said about conflicts of interest among pooled plan providers and how those could mean trickle-down legal risks on participating employers.

Congress designed PEPs and their providers to be one-stop shops for 401(k) solutions. But some providers take that to mean they should fulfill multiple roles often broken up among different individuals and organizations in a more typical 401(k), Kirchner said. There are some pooled plan providers who take on the role of investment manager, multi-asset provider, recordkeeper, and trustee, giving rise to conflict-of-interest concerns.

“PEPs are all about control,” said Eric Droblyen, president and CEO of Employee Fiduciary, an Alabama-based small-business 401(k) plan provider. “Pooled plan providers step into the shoes of the employer’s traditional role, and regulators lose access to the same levels of detailed information they’ve always had.”

Only about half of the 12 largest PEPs representing nearly three-quarters of the pooled marketplace avoid offering investments by parties-in-interest to the plan, according to EBSA research.

The agency said it’s actively begun the process of developing one or more safe harbors that encourage more market participants to join PEPs, part of the agency’s response to President Donald Trump‘s day-one executive order aimed at deflating the rising cost of living for American families.

“Without more guidance, there’s always going to be some employer hesitancy,” Kirchner said.