What Boards Should Know About the PEP Provisions in the SECURE Act

By Neil Lloyd


Legislation Risk Management Online Article

The United States population is aging, and for many the “golden years” will not materialize due to limited retirement savings and continued strains on government social programs. According to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2018, “one-quarter of the nonretired indicate that they have no retirement savings or pension whatsoever.”

Furthermore, according to a US Bureau of Labor Statistics press release, only 56 percent of American civilian workers participated in a retirement plan as of March 2019. Digging deeper, in private industry, participation is 68 percent for employers with 100 or more workers but only 38 percent for private employers with fewer than 100 workers.

As concerns about Americans’ retirement savings grow, organizations are under increasing pressure to support employees for current and future financial wellness. Boards should be aware of recent changes in the US retirement space and the implications for their organizations.

After a long wait, the Setting Every Community Up for a Secure Retirement (SECURE) Act was enacted on December 20, 2019. While this legislation has since been overshadowed by COVID-19 and the introduction of the Coronavirus Aid, Relief, and Economic Security Act, the SECURE Act, which contains a broad range of retirement-related provisions, will have a profound long-term impact on retirement plans in the United States.

Broadly, the SECURE Act aims to accomplish three objectives:

  1. Improve worker access to retirement benefits. This includes the introduction of Pooled Employer Plans (PEPs, which are often referred to as Open Multiple Employer Plans or Open MEPs).
  2. Promote and preserve more retirement savings. This involves delaying required minimum distributions, allowing contributions to traditional individual retirement accounts after age 70.5, increasing the safe harbor auto-escalation cap to 15 percent, and requiring employers to provide retirement coverage for long-term, part-time employees.
  3. Encourage lifetime income features. This comprises an annuity safe harbor for plan sponsors who offer in-plan income annuities, a requirement to disclose a lifetime income projection in addition to a participant’s current value, and enhanced portability for lifetime income products.

The intent of PEPs is primarily to increase the availability of retirement plans among smaller employers. Legislators, regulators, and stakeholders believe that PEPs will provide significant advantages to smaller employers including economies of scale (which should lead to lower costs), less administrative burden, and less fiduciary responsibility.

The benefits of PEPs, which can include less employer administrative workload, less fiduciary risk, lower fees, potentially high quality, market leading investment options, and hopefully better participant outcomes, appeal not only to smaller employers but many larger employers, too. While it is true that PEPs are likely to come with less flexibility, this is a trade-off that many employers are comfortable accepting. In fact, in other countries such as Australia, South Africa, and the United Kingdom, where similar pooled plan structures have been authorized, many larger employers have moved to multiple-employer structures. In Australia, according to the Association of Superannuation Funds of Australia’s Super Statistics Report, at the end of March 2020 just over 1 percent of superannuation accounts were in corporate superannuation plans; multiple-employer structures dominate the market. And during a webinar with two colleagues from the UK and South Africa, they mentioned that both markets were now 40 to 50 percent in multiple-employer structures.

Here’s how a PEP should work: A plan is established by a Pooled Plan Provider, an organization that has been approved to be the fiduciary for the PEP. The pooled plan provider will set rules for PEP governance and in most cases will appoint the various service providers, including a record keeper and investment managers. PEPs will only become available beginning in 2021, pending issuance of regulatory guidelines. There is still some uncertainty about how this will shake out, including who will offer or be allowed to offer a PEP.

An alternative is what we refer to as a grouped employer plan, very similar to a PEP. In a grouped plan, a number of single-employer plans are grouped together for the purposes of pooling assets and achieving economies of scale. In addition, a provider that offers grouped employer plans will take on the majority of the administrative and fiduciary responsibilities, just as with a PEP. The SECURE Act also simplified the administrative burden of these plans.

For 2020 and beyond, Mercer foresees an environment in which employers will be focused on running their businesses effectively, but challenged by having to devote a lot of time to managing their retirement plans—but plan participants still need help. There’s no doubt that the SECURE Act and COVID-19 will be powerful catalysts for change in the retirement industry. For one, it is likely that there will be continued elevated demand for outsourcing options, especially in outsourced investment solutions or outsourced chief investment officer solutions. There also is equal potential for PEPs and grouped employer plans.

With these considerations in mind, boards should consider asking management the following three questions:

  1. Given the litigious environment, are you comfortable with the risks you face in managing retirement plans?
  2. Given new demands on organizations arising out of the COVID-19 pandemic, have you explored the option of an outside provider taking on some of your administrative responsibilities?
  3. Have you considered pooled plan arrangements that could potentially reduce administration and risk burdens on you and the company, and that could lead to better participant outcomes?

There is no one-size-fits-all solution. Some employers will embrace PEPs, while others will prefer the grouped employer plans that offer many of the same advantages as PEPs but may provide more client flexibility. It will be interesting to see whether large employers will become further disposed to delegate the responsibilities of maintaining the plan to an outsourced provider.

Neil Lloyd is the head of US Defined Contribution and Financial Wellness Research at Mercer.

Please read Mercer’s Important Notices related to the article.

Neil Lloyd
Neil Lloyd is the head of US Defined Contribution and Financial Wellness Research at Mercer.