As a follow up to the DOL's recent guidance allowing states to sponsor multiple employer 401(k) plans, Congress this week is expected to pass legislation that could have a meaningful long-term impact on the 401(k) industry.
The legislation, included in the tax extenders package, would create Pooled Employer Plans ("PEP"s), which are effectively multiple employer plans with no required nexus for participating employers other than the adoption of the same plan. These PEPs can then be established by anyone meeting a number of requirements (see below) as a Pooled Plan Provider ("PPP"). There are some significant responsibilities and requirements in order to be a PPP and to set up a PEP. The PPP has to be the Named Fiduciary of the PEP and is responsible for plan administration and operational compliance, although certain functions can be, and are expected to be, outsourced to others, including other fiduciaries. There are reporting requirements from the PPP to participating employers and from participating employers to the PPP. And there is authority given to IRS and DOL to audit the PPP as the plan sponsor. Certainly, ERISA lawyers and compliance officers will want to carefully analyze the legislation, and this will no doubt give providers some pause before taking this on.
Despite those requirements, there are significant drivers that could stimulate interest in PEPs by plan sponsors and those who support them, including the elimination of the requirement of filing individual Form 5500s by participating employers, as well as the associated individual plan audit costs.
What This Means for Advisors and Plan Sponsors
Currently for a relatively small plan subject to the plan audit requirement (more than 100 participants) the audit can be thousands of dollars. For larger plans, the cost can be tens of thousands of dollars. Significantly reducing or practically eliminating (depending on the size of the PEP) that cost would likely be appealing to plan sponsors.
Also, this would potentially eliminate the need for filing a Form 5500, including the need for some plan sponsors to deal with the EFAST filing system. And, let's face it, no one wants to file a government form if they don't have to.
Importantly, the legislation provides that the employers participating in the PEP retain the fiduciary responsibility for selecting and monitoring the PPP, as well as any other named fiduciary of the PEP. Further, the legislation explicitly contemplates the role of plan advisors by specifically allowing participating employers to retain fiduciary responsibility for plan investments with their own plan advisors helping them to satisfy those responsibilities.
The bottom line for plan advisors is that by having the PPP take on the administrative responsibilities of a 3(16) fiduciary, the plan advisor should be better positioned to focus on what has historically been their primary emphasis: plan investments (selection / monitoring / process / stewardship), maximizing participant outcomes and helping to manage overall plan costs.
What This Means for Broker-Dealers and RIAs
For one, if advisors want something, that means broker-dealers and RIAs are going to want to be responsive. But it also may be a new branding opportunity for broker-dealers, which might be attractive. For example, broker-dealers and RIAs may decide there is value in having their own branded PEP and, for some, perhaps even multiple PEPs with different features for sophisticated plan advisors.
At this point it seems unlikely that, for compliance reasons, broker-dealers or RIA firms would want to act as the PPP. They may, however, want to partner with a recordkeeper who is willing to act as the PPP for their branded PEP. Or they might choose to partner with a third-party facilitator, who would act as the PPP and, through technology, coordinate with multiple recordkeepers for plan advisors who desire access to multiple platforms.
What This Means for Recordkeeping Providers
Quite possibly, a lot. There will be the inevitable discussion of consolidation, but that may be missing the point. There will be enormous competitive pressure to update technologies and operational compliance systems so recordkeepers can either act as PPPs or be providers to those assuming the legal responsibilities of the PPP.
The emphasis on operational compliance in the legislation is not just academic. The legislation specifically makes the PPP responsible for ensuring the PEP complies with IRS plan qualification rules and explicitly mentions testing. Recordkeepers, either acting as a PPP or providing services to a PPP, are likely going to need to strengthen their compliance systems and the qualifications of their personnel, whether internal or external through a network of TPAs, to make this happen.
These are not just normal competitive pressures. It will be more like a race with those getting up to speed the fastest obtaining a significant competitive advantage. And with a January 1, 2016, effective date, this is more like a shotgun start.
Up till now, multiple employer plans (MEPs) have generally been viewed as somewhat "cookie-cutter," closed-architecture and lacking in flexibility / customization. The big question with this new legislation is, will PEPs represent a small incremental step in the 401(k) industry, or will the marketplace evolve to position the PEP as a real game changer?
Brian Graff is the CEO of the American Retirement Association.
The legislation, included in the tax extenders package, would create Pooled Employer Plans ("PEP"s), which are effectively multiple employer plans with no required nexus for participating employers other than the adoption of the same plan. These PEPs can then be established by anyone meeting a number of requirements (see below) as a Pooled Plan Provider ("PPP"). There are some significant responsibilities and requirements in order to be a PPP and to set up a PEP. The PPP has to be the Named Fiduciary of the PEP and is responsible for plan administration and operational compliance, although certain functions can be, and are expected to be, outsourced to others, including other fiduciaries. There are reporting requirements from the PPP to participating employers and from participating employers to the PPP. And there is authority given to IRS and DOL to audit the PPP as the plan sponsor. Certainly, ERISA lawyers and compliance officers will want to carefully analyze the legislation, and this will no doubt give providers some pause before taking this on.
Despite those requirements, there are significant drivers that could stimulate interest in PEPs by plan sponsors and those who support them, including the elimination of the requirement of filing individual Form 5500s by participating employers, as well as the associated individual plan audit costs.
What This Means for Advisors and Plan Sponsors
Currently for a relatively small plan subject to the plan audit requirement (more than 100 participants) the audit can be thousands of dollars. For larger plans, the cost can be tens of thousands of dollars. Significantly reducing or practically eliminating (depending on the size of the PEP) that cost would likely be appealing to plan sponsors.
Also, this would potentially eliminate the need for filing a Form 5500, including the need for some plan sponsors to deal with the EFAST filing system. And, let's face it, no one wants to file a government form if they don't have to.
Importantly, the legislation provides that the employers participating in the PEP retain the fiduciary responsibility for selecting and monitoring the PPP, as well as any other named fiduciary of the PEP. Further, the legislation explicitly contemplates the role of plan advisors by specifically allowing participating employers to retain fiduciary responsibility for plan investments with their own plan advisors helping them to satisfy those responsibilities.
The bottom line for plan advisors is that by having the PPP take on the administrative responsibilities of a 3(16) fiduciary, the plan advisor should be better positioned to focus on what has historically been their primary emphasis: plan investments (selection / monitoring / process / stewardship), maximizing participant outcomes and helping to manage overall plan costs.
What This Means for Broker-Dealers and RIAs
For one, if advisors want something, that means broker-dealers and RIAs are going to want to be responsive. But it also may be a new branding opportunity for broker-dealers, which might be attractive. For example, broker-dealers and RIAs may decide there is value in having their own branded PEP and, for some, perhaps even multiple PEPs with different features for sophisticated plan advisors.
At this point it seems unlikely that, for compliance reasons, broker-dealers or RIA firms would want to act as the PPP. They may, however, want to partner with a recordkeeper who is willing to act as the PPP for their branded PEP. Or they might choose to partner with a third-party facilitator, who would act as the PPP and, through technology, coordinate with multiple recordkeepers for plan advisors who desire access to multiple platforms.
What This Means for Recordkeeping Providers
Quite possibly, a lot. There will be the inevitable discussion of consolidation, but that may be missing the point. There will be enormous competitive pressure to update technologies and operational compliance systems so recordkeepers can either act as PPPs or be providers to those assuming the legal responsibilities of the PPP.
The emphasis on operational compliance in the legislation is not just academic. The legislation specifically makes the PPP responsible for ensuring the PEP complies with IRS plan qualification rules and explicitly mentions testing. Recordkeepers, either acting as a PPP or providing services to a PPP, are likely going to need to strengthen their compliance systems and the qualifications of their personnel, whether internal or external through a network of TPAs, to make this happen.
These are not just normal competitive pressures. It will be more like a race with those getting up to speed the fastest obtaining a significant competitive advantage. And with a January 1, 2016, effective date, this is more like a shotgun start.
Up till now, multiple employer plans (MEPs) have generally been viewed as somewhat "cookie-cutter," closed-architecture and lacking in flexibility / customization. The big question with this new legislation is, will PEPs represent a small incremental step in the 401(k) industry, or will the marketplace evolve to position the PEP as a real game changer?
Brian Graff is the CEO of the American Retirement Association.
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