PEPs, Disruptors and Other Stuff - With J.D. Carlson
I recently chatted with J.D. Carlson of Plan Design Consultants and the podcast Retireholiks about Pooled Employer Plans, disruptors, and lots of other topics. It was a lively conversation - J.D. was generous with his opinions (!) and shared his knowledge, as well. Read on for the recap plus a little more I didn’t get to say.
Pooled Employer Plans: Cat’s Pajamas or the Litter Box?
First things first - what’s a Pooled Employer Plan (PEP)?
Basically, it’s when a whole bunch of unrelated companies pool together and join a retirement plan that is sponsored and led by a third party. Considering only about half of working Americans are covered by a 401(k) plan through their employer, a PEP sounds like a great idea. Why not help small businesses offer 401(k) plans to their employees?
According to J.D. (who is not a fan of PEPs, BTW), a major draw of PEPs are the fiduciary services; however, once you add on the costs for 3(38) fiduciary investment advice, the 3(16) administrator services, and the pooled plan provider, the cost becomes prohibitive for many small businesses. In fact, if you compare the average PEP with the average “classic” 401k, the PEP will often be more expensive.
When the bill to create PEPs went through and was passed by Congress, the idea was to create economies of scale and lower pricing. While there are some other benefits to PEPs, such as offloading of the fiduciary responsibilities, ways to accomplish these benefits existed long before PEPs came onto the scene. Not to mention that any fiduciary services provided through a PEP will usually be low touch and robotic in nature to perform services at scale. After all, these types of programs are trying to be efficient as well as profitable.
Finally, plan sponsors never get rid of the duty to monitor. Even if they join a PEP, they still have the liability for due diligence, only paying reasonable fees, and service provider monitoring, just as they would in a stand alone plan.
So are PEPs the cat’s pajamas? We’ll go with no. If you’d like to read more, we have a white paper on the subject complete with questions you should ask and contract provisions you should explore. Contact us for a copy.
“Disruptors”
Every so often, a disruptor comes along and changes the entire landscape of an industry. Think Uber and taxi drivers. There have been companies that claim to be disruptors to the retirement plan industry, but are they really disrupting anything?
The goal of the disruptors was to offer more efficient and technology-advanced solutions for consumers, resulting in lower costs. Instead, when they came to market, they cut out the financial advisor’s role, promoted an institutional share class of index funds, and added cheap administration with simplified provisions available. All of these reduce plan costs, but at what price? We would argue service, design options, and the ability to maximize your plan for your company. We wrote a blog post about what retirement plan advisors do - you can find it here.
One thing these “disruptors” have done well, though, is create a better user/employee experience, with websites and apps that are thoughtfully designed. They have also managed to successfully leverage their partnerships with payroll providers and build pipelines to share data.
There are a lot of moving parts involved when it comes to employer retirement plans. One big question is, do you really want to hand the job over to a VC-backed company that hasn’t invested in bringing on a deep bench of experts or is lacking a service staff and relying solely on payroll data with the assumption that it could never be wrong? Do they even have any retirement plan experts on their staff? Who will be calling you to discuss the impact of SECURE 2.0 on your plan and its systems? JD’s prediction is that these disruptors will probably end up being acquired by established companies. I’m not sure we disagree.
Year End / Year Start Checklist
J.D. has a few suggestions for what plan sponsors can do at year end to make sure everything is in order:
Look back at your census from last year and triple check it with your payroll and HR team - Are those right pathways happening with proper information being delivered back and forth? Does the definition of compensation in your document match the definition of compensation from your payroll provider? These are just a couple of things you need to take a hard look at.
Look at your deposits at your recordkeeper - Is your Safe Harbor or other match going to the right place?
Start to learn more about the operations aspect and functionality of the retirement plan - A lot of plan sponsors don’t go this far, but it will help you understand the inner workings of the plan, and help you get better service from your provider in the end.
A Word About Automatic Enrollment
Automatic enrollment is a good thing, but you absolutely need to know how you’re going to implement and monitor it, as well as know any risks or mistakes that may happen. If you’re going to implement it, it has to be done right. If you tell an employee you’re going to automatically enroll them at 3%, and then don’t do it, you are looking at correction payments and paperwork to fix it. Read our blog post on automatic enrollment for more of our thoughts on this topic.
It’s so important to have the right folks on your team to help you spot any plan deficiencies. If you feel like you may not have the right people by your side to help run your company’s retirement plan, give us a call.