Pooled Employer Plans Growth Faces Adoption Headwinds
Predicting which products and services will become mainstream in defined contribution plans is a tricky and at times life and death exercise. Firms use market research and focus groups to eliminate fringe or niche services but there are no guarantees. After over five years, it’s fair to ask the same questions about pooled employer plans, which were allowed under SECURE 1.0.
A fad was ETFs, which many thought would take over for mutual funds, but their limited value relative to index funds could not overcome operational issues, though that could change with the recent SEC dual-class share rules. Perhaps student loans, HSAs and emergency savings will suffer the same fate. For literally decades, we have been hearing that embedded retirement income would explode, but so far it has not even reached niche status.
CITs seem to be on the road to becoming essential products due mostly to cost savings. Auto features are becoming mainstream and spreading, driving growth in target date funds. Managed accounts are growing, and financial planning, which could lead to outside assets surfing the wave of convergence, along with IRA rollovers.
Essential services and products have at least one of three characteristics:
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Client demand and/or competitive advantage
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Significant revenue opportunities
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Laws and rules allow or require them
Those that have all three like the auto plan and TDFs rule. Just because a product or service, like student loans, HSAs and PEPs, is allowed does not mean they become mainstream—one of the other two elements must also be present.
So where do PEPs land?
Fred Reish was misquoted, saying 50% of plans would be in a PEP, which, regardless of the number, indicated that he thought and maybe still thinks they will become mainstream. The growth of PEPs has been significant, with an estimated $21 billion in 2024 and 51,000 employers, according to Cerulli, based on 5,500 reports, up from $2.2 billion and 8,600 employers plans in 2021, and double the assets from 2023. (Experts believe the current number to be $30 billion to $40 billion.) Plan sponsor demand seems high, according to Cerulli, with 48% very interested in joining, led by 67% of plans with $250 million to $1 billion in assets, and just 31% of plans under $5 million.
Many major record keepers are bullish—Transamerica and Voya have been leaders of group plans for decades, with Paychex, The Standard and Empower catching up. AON and Creative Planning (inherited from Lockton) lead the distributors. Fidelity has one PEP, and Vanguard has none, with ADP recently launching theirs. MassMutual has leaned into PEPs, partnering with Alerus—Commonwealth launched one with Vestwell just before they were sold to LPL Financial. None of the other aggregators, broker/dealers or wirehouses crack the top 15.
The case for PEPs is compelling. Offload administrative work to a more experienced group—as well as fiduciary liability. Costs are not necessarily lower for PEPs because:
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Investment fees are so low anyway, especially index funds and CITs.
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Recordkeeping and advisory fees continue to decline at an alarming rate.
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Offering 3(16) fiduciary protection can be expensive.
The headwinds, according to Cerulli, include:
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Loss of control over plan design and investments
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Limited cost savings, especially for those not requiring an audit
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Negative employee perception
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Discouragement by advisors or consultants
Each adopting plan must be sold, which takes time. Though Cerulli indicates strong demand among plan sponsors, they rarely ask about it at TPSU programs. Perhaps the industry fails to explain them properly, which is a common problem. A Standard rep at a TPSU explained it well—his dad had a big house with lots of land and a pool. As he got older, he struggled to take care of it, so he moved into assisted living.
The explosion of small plans could fuel PEPs with Paychex using them for new plans, but they must be sold individually. New PEPs are popping up like frogs during a monsoon, but just one in five has substantial plans or assets.
There are inherent conflicts when an advisory firm or record keeper is the pooled plan provider—unlike a solo plan sponsor, no one expects them to conduct unbiased due diligence, much less replace themselves. Even independent PPPs can be conflicted if they rely on a provider or advisory firm for distribution.
Advisors may be reluctant to place clients in a PEP, especially those that focus on fees, funds and fiduciary. They may be even more reluctant to place clients in their broker/dealer’s or RIA’s PEP, which will be harder to move if they change affiliations or sell their practice.
Though PPPs may be more willing to embed retirement income and deploy alts, the number of asset managers used will decrease. Smaller plans are not targets of litigation, but their PEP might be, and there has been no data yet that shows that larger plans are safer in a group plan scheme.
So even if PEPs reach $300 billion in five years, which would be a 10x growth, they would still only represent less than 2% of DC assets—would that be considered mainstream?
