401(k) firms line up for PEPs, anticipating big business in 2021

Next year could be big for pooled employer plans, if announcements from several retirement service companies are any indication.

Just last Wednesday, the Department of Labor finalized its registration rule for pooled plan providers, or PPPs, with its new site going live next Wednesday. But for months, numerous companies have been indicating plans to launch their first PEPs on Jan. 1.

Some of those professed early entrants include Aon, Lockton Retirement, Mercer, Mesirow Retirement Advisory Services and The Platinum 401k.

A few large retirement plan record keepers have said they would provide services to those plans — Voya Financial, for example, will be the record keeper for Aon’s PEP, Empower Retirement for Mercer’s and Transamerica for Lockton’s plan.

On Monday, another record keeper, Principal, announced plans for its own PEP. The company is in the process of integrating the Wells Fargo Institutional Retirement Trust business it acquired last year, and it is expected to have about 45,000 retirement plans under its belt when the integration is completed in roughly a year.

Other record keepers could soon follow. According to a survey Principal cited in its announcement, 38% of plan sponsors, regardless of the size of their plans, said they would consider moving from a traditional 401(k) to a PEP. Plan providers that don’t offer PEPs could risk losing clients.

“PEPs are going to change how we do business,” said Kelly Michel, principal at KME Retirement Consulting. “Within a few years, we won’t see single-employer plans in the micro and small-plan market.”

PEPs will be a cheaper option for such employers, and they could also see a benefit of offloading some fiduciary liability. That interest will eventually cause assets from many small plans to be consolidated in much larger PEPs, Michel said.

While the new type of plan, a result of last year’s SECURE Act, will almost certain expand access to workplace retirement savings plans, its structure poses “an existential threat to third-party administrators,” she said.

“You’ll see a lot of these plans start because a TPA wants to be valuable still,” she said.

The early announcements from companies planning to register as PPPs likely represent a small fraction of the interest among plan providers, TPAs, retirement plan advisers and others. There will likely be hundreds of entities lining up to provide PEPs next year, Michel said.

“There is an enormous blue ocean of businesses that could benefit from these programs,” she said.

The change is the U.S. defined-contribution market could mirror that currently underway in the United Kingdom, she noted. There, the relatively new master-trust structure is pulling in business, increasingly from what were once single-employer plans.

“Master trusts continue to be the fastest growing sector of defined contribution (DC) pension provision, growing at 65%, compared to 22% growth in trust-based schemes and 18% in contract-based schemes from 2018 to 2019,” an October report from Aegon stated, citing data from Broadridge. That report estimated that about half of the DC assets in the U.K. will be held in master trusts by 2028.

There could be even more opportunity in the U.S. retirement plan market if 403(b) plans for universities and nonprofits become eligible to participate in PEPs. Rep. Ron Kind, D-Wis., introduced a bill last month that, if passed, would allow 403(b)s to begin participating in PEPs as early as next year.

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