Advisers look to PEP market for growth

As pooled employer plans hit the market, advisers increasingly are putting them on their radar as potential options for their plan sponsor clients.

Matthew Hoesch, a retirement plan consultant with registered investment adviser firm Lockton Investment Advisors LLC in Washington, sees the new pooled plans as a "silver bullet" for many of his clients. They're a great fit, he says, for employers that "have a lot of other things they need to do than deal with the administration of a 401(k)."

Mr. Hoesch has helped three employers with stand-alone 401(k) plans ranging from $3 million to $10 million move into a pooled employer plan called (k)Praetorian, one of three PEPs his firm advises as the 3(38) investment manager, the fiduciary overseeing plan investment lineups. Mr. Hoesch declined to name the firms, saying only that they're in the consulting and technology industries.

In addition to the three companies, he has a half-dozen other plan sponsors that he says are considering joining (k)Praetorian to "get administrative work off their plates," offload most of their fiduciary responsibility and avoid having to conduct and pay for an audit.

"It's a huge time and cost saver," he says. Mr. Hoesch estimates plan sponsors can save an average of 15% to 25% in costs depending on plan size and other factors. Most plan sponsors, though, "value the outsourcing above any savings," he says.

Mr. Hoesch joins other Lockton retirement plan advisers that have been educating plan sponsor clients about Lockton's three PEPs and about the benefits of pooled plans in general. In addition to (k)Praetorian, Lockton offers the EZ(k) Flex Pooled Employer Plan, which like (k)Praetorian is designed for sponsors of midsize plans with up to $500 million in assets, as well as the Lockton Pooled Retirement Plan designed for sponsors of startup and micro plans. Lockton serves all three in a 3(38) fiduciary capacity.

Lockton, an RIA firm with $102 billion in assets under management, is among a handful of firms that are delving into the pooled employer plan market as 3(38) investment managers, a move they say will give them a head start in a business they see as promising. RIA OneDigital Investment Advisors, for instance, is acting as the 3(38) investment manager for the OneDigital Pooled Employer Plan it launched in July. PlanMember Financial Corp. also rolled out a pooled employer plan in April in which its RIA firm, PlanMember Securities Corp., serves as the 3(38).

The firms anticipate that the new pooled 401(k) plans will resonate with a wide swath of employers looking to offload plan administrative duties and lower plan costs through greater economies of scale.

The new plans, which started rolling out Jan. 1 under the SECURE Act, give employers in unrelated businesses a big incentive to pool their assets as they no longer need to file separate Form 5500s and conduct separate annual audits as they were previously required to do. They also allow plan sponsors to outsource their day-to-day administrative work and the bulk of their fiduciary responsibilities to third-party service providers, such as 3(38) investment managers that take over the selection and management of investment lineups.

For RIA firms that already serve single-employer plans as 3(38) managers, the jump into the PEP market as 3(38) providers is a logical move, industry sources said.

Oswald Financial Inc., an RIA firm that offers clients a PEP in which it acts as the 3(38) investment manager, provides about 30% of its plan sponsors with 3(38) services, drawing on the expertise of an internal investment committee that reviews, monitors and vets all the funds in plan sponsors' investment lineups, said Michael Gheen, the firm's Cleveland-based vice president of retirement plan services. "We have been doing it, we have a process in place, so it seemed like a natural progression for us to be the 3(38) on the PEP," he said.

RIA firms also see PEP offerings as a way to fend off competitors that decide to offer employers pooled retirement plan options.

"If we didn't have a PEP, our competitors down the street would," Mr. Gheen said.

Still, some RIA firms with large retirement plan businesses are sitting tight. Kathleen Hopkins, a spokeswoman for CAPTRUST Financial Advisors LLC, an RIA firm with more than $600 billion in assets under advisement and more than $60 billion in assets under management, for instance, said it has no imminent plans to launch a PEP or participate in one as a 3(38). Jenna Shields, a spokeswoman for Hub International, an insurance broker whose RIA business has about $105 billion in assets under advisement, declined to disclose the company's plans, saying only that it continues to evaluate options that will support its client base. Hub has been acquiring retirement-focused firms since 2017 in a push to bulk up its retirement plan and wealth management business.

SageView Advisory Group LLC, meanwhile, is holding off on a decision to convert its current multiple employer plan — the USA Retirement Savings Plan, which has three sponsors and $5.2 million in assets — into a pooled employer plan until further guidance from the Department of Labor, said Jon T. Upham, a Newport Beach, Calif.-based principal at SageView.

For now at least, Lockton appears to be the most aggressive about pursuing the PEP market. With three PEPs in place, the firm is looking to provide clients with a range of plan options, said Samuel Henson, Lockton's Kansas City, Mo.-based chief client officer.

"As we evaluated PEP opportunities for us and our client base, we quickly realized that a one-size-fits-all solution wouldn't do," Mr. Henson said.

Lockton's two PEPs aimed at sponsors of mid- to large-size plans with assets between $15 million to $500 million — (k)Praetorian and EZ(k) Flex — went live on Jan. 1. The two PEPs have 10 plan sponsors with about $650 million in assets between them and at least 35 additional plan sponsors evaluating whether either PEP makes sense for them, said Michael Duckett, Lockton's Washington-based director of outsourced administrative responsibilities.

"As the third quarter begins, I expect interest in the PEPs to explode among sponsors looking for a solution like this for Jan. 1," he said.

The third Lockton PEP — launched in June for employers without workplace retirement plans as well as sponsors of small plans with up to $10 million in assets — has not yet onboarded any clients. However, the firm has already written many proposals in response to plan sponsor requests explaining the benefits of the Lockton Pooled Retirement Plan, an encouraging sign given that the PEP is only a month old, Mr. Henson said.

Each of the three PEPs use different service providers: (k)Praetorian uses Principal Financial Group as the record keeper, while EZ(k) Flex uses Transamerica Corp. and the Lockton plan uses Newport Group Inc.

The three PEPs also have different investment lineups consisting of actively managed, index, target-date, stable value, fixed-income and international fund options, Mr. Henson said. They use collective investment trusts where possible to keep costs low, he said.

"The Lockton PEPs have been designed specifically to bring the scale and efficiency typically only accessible to the megaplan market to plans of all sizes," Mr. Henson said.

OneDigital's pooled employer plan also uses collective investment trusts along with a diversified core menu of "name-brand mutual funds" as well as alternatives, index funds, actively managed funds and target-date funds, said Vince Morris, president of OneDigital Retirement + Wealth in Overland Park, Kan.

The PEP, which was filed with the Department of Labor in July, does not yet have any adopting employers as the firm is just beginning to ramp up its marketing efforts. It is aimed at small employers that don't have the resources to run and manage their retirement plans, Mr. Morris said.

Mr. Morris sees the new PEP offering as "pairing well" with the health insurance brokerage services that the firm offers some 28,000 small employers with less than 100 employees. The PEP provides "a bundled, easy-to-administer solution" for the resource-strapped small business owner, he said.

The opportunity is such that firms opting not to offer PEPs may be "missing the boat," said Robb Smith, the Cape Canaveral, Fla.-based president of consulting firm RS Fiduciary Solutions and the founder of PEP-RFP.com, an online business that helps plan sponsors and advisers search the PEP universe and identify pooled plans that fit their needs.

Mr. Smith urges RIAs to offer PEPs to their plan sponsor clients. "It's absolutely another arrow in their quiver to offer to plan sponsors because if they're not going to offer it, somebody else is going to do it for them," he said.

So far, more than 100 PEPs and some 65 pooled plan providers have registered with the Department of Labor, he said. He anticipates that the number of registered PEPs could easily surpass 200 by the end of 2021.

"I believe the PEP market is here to stay," Mr. Smith said, noting the demand for PEP searches on PEP-RFP.com.

"We're seeing a lot of interest both from advisory firms and plan sponsors," he said.

To Mr. Smith's surprise, even larger plans with $50 million to $500 million in assets and more than 100 participants are looking at PEP options. "We never thought we'd see the amount of interest at the large plan market that we're seeing," he said.