Pooled employer plans (PEPs) are a relatively new retirement savings vehicle that allow multiple unrelated employers to participate in a single retirement plan. By pooling resources, employers can leverage economies of scale typically reserved for larger employers and therefore many plans will find significant cost savings in switching to a PEP. However, there is a wide disparity in both the type of fee and the fee levels charged by different PEP providers. It can be difficult to get to the bottom line, but it is essential to understand all fees and reasons for any disparities to be able to accurately compare providers. Below we examine some of the details that need to be assessed when an employer makes the key fiduciary decision to switch to a PEP.
The overall US PEP landscape is only a few years old and is still working through common pricing approaches, i.e. there is no standardized fee level or fee structure for PEPs. As a result, total fee levels and the way fees are calculated vary widely from one provider to the next and sometimes even within a provider.
Some PEP providers charge fees based on a flat percentage of assets and others have tiered percentage fees so that the more assets an employer is bringing into the PEP, the less it pays. Providers can also charge based on flat, headcount-based dollar fees, while others offer a fee structure made up of a combination of some or all of the above and break the fees out by types of service offered. We’ve found PEP fee structures can be a real headache to navigate but it is crucial to understand the full picture to find the best options for you and your participants.
While all PEPs offer core services that include administration, recordkeeping, and investment management, they differ in other ways. First, they can differ in participant tools and services. While two PEPs might have a similar fee, their participant services like websites, calculators, education classes, and advice might be quite different and may be valued differently by different employers. On the employer side, while a lot of the day-to-day administration will be outsourced, there will still be some level of interaction between the PEP provider and internal staff. Understanding how the PEP provider works and if there will be a dedicated team may also sway the comparison.
Another key element in comparing PEP costs are the investment options, especially the qualified default investment alternative (QDIA, which is generally a target date series or a managed account). The QDIA tends to be the most widely used investment vehicle in the plan. Active target date funds generally have a higher cost than passive ones because of the higher expense of active management. If a PEP provides a managed account as a QDIA, that tends to be an even higher charge for the added service. So, comparing one to the other is like comparing apples to oranges. Gaining a clear understanding of these distinctions is crucial for making a fair assessment of PEPs. (See our article regarding PEPs and QDIA options)
PEPs will also vary by who bears the costs: participants or the employer. While certain PEPs require participants to cover all expenses, others grant the employer the decision-making power. This is an important factor to many organizations and may sway the decision.
Finally, for a fair comparison between the current plan costs and a specific PEP, the plan sponsor must factor in and estimate internal costs for tasks such as testing, audit, and 5500 filings. Transitioning to a PEP is outsourcing the day-to-day oversight of the defined contribution plan and a PEP provider will also take on some of the fiduciary responsibility. Hence, accounting for the time, expenses, and fiduciary liability undertaken by internal staff to manage and administer the plan and comparing it to the overall PEP cost will ensure an equitable evaluation.
Overall, there are a multitude of factors that impact the fees charged by PEP providers. These factors include but are not limited to, the level of services offered, the size of the plan, the investment options offered, the level of fiduciary responsibility assumed, and the regulatory environment. As PEPs continue to grow in popularity, it is likely that we will see greater standardization in fee structures, however, it is always important to remain aware and understand what may be driving the differences.