This is another article in our series on Pooled Employer Plans (PEPs) – click here for an introduction to PEPs.
The goal of one of the provisions in the bill that allowed for PEPs was to encourage employers that did not provide retirement plans due to cost or complexity to offer one. However, economies of scale offered by the multitude of PEP providers offer potential benefits to existing small and mid-size plans as well. We continue our series of articles focused on PEP plans, with a discussion on fees.
Fee compression has been an ongoing trend in defined contribution (DC) plans for many years now, impacting the headline administrative and investment-related costs that comprise the lion’s share of overall plan costs. The trend started with larger plans and has worked its way down to smaller plans. With a minimum of effort, most plans enjoy considerably lower costs today than they did 7-10 years ago. With ongoing scrutiny on plan costs, PEPs are a logical vehicle to extend cost savings to smaller sponsors that make up the majority of the DC plan universe.
One of the key differences among the various PEP providers is fees and how those fees are calculated. As PEPs mature, we expect that fee structures will evolve as well. In general, PEPs fees are based on some combination of the following:
- Fixed annual fee
- Per participant charge
- Asset-based fee
- 3(16) plan administration fiduciary fees
- 3(38) investment management fiduciary fees
- Ad hoc and/or one-time administrative fees
In our experience, we have seen PEP fees differ substantially by provider for the same plan sponsor. In one recent RFP that we ran the difference in fees between the highest and lowest cost providers was about three times. There are similarities and a few key differences in the manner in which fees are assessed between PEPs and traditional DC Plans. Best practice for single sponsor DC Plan administrative fees currently is on a per-participant basis. This approach is simple and transparent. Asset-based fees are also common, although much of the time the fees will rise as plan assets grow, the result of ongoing contributions and market movements.
On balance, the most common fee arrangements we’ve seen among the various PEP providers involve a combination of fixed and asset-based charges. These are generally assessed to participant accounts on a quarterly basis. Other fees, mostly transactional in nature such as loan administration, minimum required distributions, etc. also apply but are broadly consistent across providers.
A less visible benefit of a PEP for many plan sponsors is savings from the investment strategies in their fund lineup. Costs from the investments are deducted from the returns of the investments, so ongoing savings can have a meaningful impact on participant outcomes. Here, economies of scale can come into play as PEP participants will likely be able to access lower-cost investment vehicles than an individual sponsor could offer on their own, especially at the smaller end of the market. In addition, the inclusion of a 3(38) fiduciary investment advisor in a PEP adds a level of fiduciary oversight and monitoring of both fees and performance.
As with a standalone DC plan, understanding how fees are assessed in a PEP plan is essential. In the current environment, we would expect the various fee models to evolve and consolidate over time as the market becomes more competitive. It is clear to us that PEPs can offer potential savings to sponsors, but the buyer must be able to compare the various offerings on a level playing field. Given the amount of fiduciary responsibility that PEPs take on for the plan, this is one area where a plan sponsor’s fiduciary responsibility is most critical in ensuring that the PEP fees are competitive and commensurate with the services provided.