Pooled 401(k)s Receive Low Employer Buy-In as Confusion Persists

Uncertainty about the cost and structure of recently authorized pooled-employer retirement plans is driving down participation in an option previously touted as a game changer for the 401(k) industry.

Fewer than 300 firms have registered with the US Labor Department to sponsor the plans since they were green lit by Congress in 2019, according to agency data.

The DOL’s Employee Benefits Security Administration had predicted as many as 3,200 early registrants in a 2021 rule outlining provider sign-ups for the plans, which allow groups of disparate employers to offer their workers 401(k) coverage under a single plan.

Pooled 401(k) options—part of the SECURE Act passed by Congress in late 2019—were intended to address the growing shortage of worker access to employer-sponsored nest eggs in the US and stem the tide of older Americans leaving the workforce without adequate savings. But pooled employer plans, or PEPs, are proving too complicated and legally uncertain for many employers to join, threatening their long-term efficacy in bolstering retirement security.

“The worst aspect of our retirement system is that, if you take a snapshot in time, only half of private-sector workers are working for employers that offer a plan,” said Alicia Munnell, director of the Center for Retirement Research at Boston College and former assistant US Treasury Department secretary for economic policy under President Bill Clinton. “It seems to me that from the beginning, PEPs were going to have a very limited impact on that.”

Troubling Trends

A study issued by the Center for Retirement Research issued in January found that many of the purported benefits to joining a PEP may be overblown, and that the potential for higher costs, limited coverage, and trouble exiting plans for employers may outweigh their ability to cut compliance burdens.

Unlike multiple employer plans, or MEPs, PEP participants don’t require a “common nexus,” like participation in an industry group or chamber of commerce. Pooled plan providers can gather employers together from all over the country to form a single plan, adding economies of scale to the costly and time-consuming job of getting a plan up and running.

Individual employer participants don’t have to file separate individual audits when they participate in a pooled plan, which is a major selling point for companies marketing a plan, said Eric Droblyen, president and CEO of Employee Fiduciary, an Alabama-based small-business 401(k) plan provider.

“PEPs are all about control,” Droblyen said. “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.”

Insurance companies in particular are flocking to set up shop as pooled plan providers to sell products such as annuities that they’ve had a harder time marketing directly to individual plan sponsor clients, he added.

Costs and Conclusions

The relative cost savings companies gain by accessing investment opportunities usually reserved for larger firms with more potential assets under management are uncertain at best, Munnell said. Multiple employer plans have remained small by comparison, meaning they tap into the same investment classes as most mid-sized institutional investors.

But most troubling to Munnell and Droblyen is a growing concern that the rules governing PEPs will make it difficult for employers to leave. Traditionally, employers that choose to stop offering a 401(k) plan terminate it, creating a distributable event that gives workers a tax-advantaged reason to cash out or transfer their assets to a bank-controlled investment vehicle.

Since individual employers aren’t the sponsor of a pooled plan, leaving it won’t create a distributable event unless they set up a separate individual plan with the sole intent of closing it down—a hard sell for an employer that is seeking a clean exit from the 401(k) space altogether, they said.

“Terminating a single-employer plan is easy-peasy,” Droblyen said. “Getting out of a pooled plan is nearly impossible.”

Future Focus

Some employee benefits industry observers believe PEPs are the workplace retirement option of the future, however. Fred Reish, a partner at Faegre Drinker Biddle & Reath LLP, told the National Association of Plan Advisors in February to begin preparing for the number of PEPs to equal in size to the single-employer market within a decade.

Although the majority of new PEP customers aren’t new entrants to the 401(k) market, retirement plan startups are beginning to find their way to pooled plan providers, said Tyler Polk, a partner and senior consultant for Fiducient Advisors LLC, a PEP distributor that connects clients with pooled plan providers.

More small individual plan participants will increase PEP sizes, drawing down costs, said Ginger Brennan, who oversees multiple employer solutions for Voya Financial. And as for concerns over audits, regulators such as EBSA aren’t giving pooled plans a pass on handing over relevant financial information and data, which simply shifts the responsibility for ensuring information is correct from individual employers to pooled plan providers, she said.

“PEPs would be an extremely hard sell if it were just about costs to employers,” she said. “This is about what employers can offer their workers, and I think PEPs offer a lot.”