Labor Department to Mull 401(k) Guidance to Expand Pooled Plans

The US Labor Department is exploring regulatory action that would boost participation in the kinds of pooled retirement options Congress established in 2019 to encourage more businesses to set up and sponsor workplace 401(k)s.

A working group of pooled plan providers will meet with employee benefits regulators as early as next month to discuss guidance the industry believes is necessary to eliminate implementation hurdles participating employers are facing, pooled plan providers said.

Roundtable discussions with stakeholders are part of a 2023 priority the Employee Benefits Security Administration announced this month to “explore areas where regulatory or other guidance would facilitate establishment and operation of pooled employer plans.” The Labor Department didn’t immediately respond to a request for comment.

Congress billed pooled employer plans, or PEPs, as a gamechanger for the retirement industry in 2019, allowing groups of employers to shed the fiduciary risks and administrative burdens of sponsoring a workplace plan by grouping them under a single entity. So far, though, the number of companies that have signed up to absorb those risks is down, and participating employers are navigating what one provider called a “wild-wild west” of operational uncertainties and potential legal pitfalls.

“That’s why we really want to talk to the DOL,” said Robb Smith, president of RS Fiduciary Solutions, an independent employee benefits law consulting firm. “We need to start bringing in the sheriffs who can say, ‘Here’s what the rules are; this is how these pooled employer plans are supposed to operate.”

Under-Performing PEPs

PEPs have far under-performed expectations the Labor Department set out for them in the wake of the 2019 SECURE Act (Pub.L. 116-94).

The final rule (RIN No. 1210-AB94) EBSA issued in 2020 laying out the processes for establishing PEPs anticipated as many as 3,200 companies would “initially register” as pooled plan providers. To date, just over 100 companies have registered, according to 2022 agency filings.

“The uptake has not been as robust as what we think Congress hoped it would be,” said Jeanne Klinefelter Wilson, a principal employee benefits attorney with Groom Law Group Chartered who served as acting assistant secretary at EBSA when the 2020 rule was issued.

Business model development and employer education are major factors in pooled plan implementation, Wilson said. But the Labor Department’s willingness to engage with stakeholders signals that it understands the need for employer-friendly guidance.

Employers still don’t fully understand the liabilities they retain when they sign up for a PEP, said Smith. Many businesses aren’t vetting the companies that pitch low-cost pooled 401(k) plans, nor are they regularly monitoring them for behavior in the best interest of plan participants.

“There are plaintiffs attorneys who could look at this as a major issue,” he said.

Pooled plan providers also need guidance to understand whether they are violating conflict of interest laws when they hire themselves as service providers to a pooled plan they offer.

This is a major concern for registered investment advisers whose exposure to the defined-contribution industry has been limited in scope under Section 3(38) of the Employee Retirement Income Security Act of 1974 (Pub.L. 93-406).

“Right now there are gray areas for some of these plans that are ‘conflicted’ because they have billions of dollars invested in them,” said Terry Power, president and CEO of the Platinum 401(k) Inc. “The Department of Labor needs to go on the record and clarify who can do what work for plans.”

Room for Growth

PEPs may still have a lot of room to expand despite a slower start.

Late last year, lawmakers passed another legislative retirement plan overhaul dubbed the SECURE 2.0 Act (Pub.L.117–328). The new law permits nonprofit and educational institutions to form PEPs, representing “extraordinary potential for growth,” said Power.

The DOL’s projections for PEPs may also have been overly optimistic.

Investment advisers already wary of conflicted transaction exposure have always been unlikely candidates for the pooled plan provider space, because they lack the institutional knowledge recordkeeping firms and third-party administrators have always had in the 401(k) space, Smith said.

“I’m quite satisfied with the numbers as they are,” he said. “I never anticipated a huge explosion of PEP growth, because this is still so new even a few years into its development.”

The regulated community is optimistic that the department is already reaching a point that they are exploring guidance, though, said Power.

“PEPs are efficient,” he said. “They can take away a huge fiduciary burden and lower costs, but only if providers and regulators partner over the best way to deliver these benefits.”