PEP talk: Joining a PEP is easy, joining the 'right' PEP...not so fast my friend
Joining a Pooled Employer Plan is easy as long as you follow tried and true retirement plan industry best practices. But, before diving into the PEP pool, let's first review a couple of 'fiduciary' housekeeping items.
Duty of loyalty
A retirement plan fiduciary's first and foremost obligation is a duty of loyalty to plan participants. A duty of loyalty means that, in all circumstances, plan fiduciaries must act 'solely' in the best interests of participants. Actions that subvert this primary duty are considered imprudent.
Retirement plan fiduciaries include both internal (i.e., the plan sponsor's front-line workplace fiduciaries) or external (i.e., third party 3(21) investment advisors, 3(38) investment managers, 3(16) administrators, etc.) fiduciaries. Plan fiduciaries can be either named in legal plan documents or they may be considered 'functional' fiduciaries by way of the actions, authority, or duties they assume. Most functional fiduciaries assume their roles via a written contract or agreement.
So, why is understanding the duty of loyalty and the role of plan fiduciaries so important? Because the courts and regulators consider a fiduciary's obligations are the highest known to law. That means that plan fiduciaries can and will be held liable for imprudent decisions or breach of their fiduciary duties. Ask any plan fiduciary that has faced a DOL investigation or lawsuit, and they will tell you to avoid them in every way possible.
PEPs and the duty of loyalty
Prudently selecting the best plan service providers is high on the list of acting in the best interest of plan participants. While conducting a prudent search for service providers via a well-developed Request for Proposal (RFP) process may be considered non-fiduciary in nature, the resulting implementation and monitoring of the service providers selected are most certainly fiduciary in nature.
The same holds true when considering a Pooled Employer Plan (PEP). In essence, an employer considering a PEP is choosing a service provider. Choosing a PEP as a service provider is the same as choosing a service provider for a single-employer plan…only more comprehensive. Why? Because a PEP has many more moving parts that have to be considered.
Consider that when vetting PEP options an advisor and potential adopting employer need to consider not only the PEP service providers but also the PEP services and plan options, the Pooled Plan Provider (P3) that is responsible for the operation and management of the PEP, division of responsibilities between the employer and the PEP, as well as fees associated with the PEP.
The same is true once an employer joins a PEP. The SECURE Act explicitly states that adopting employers remain 'limited-scope' plan sponsors and so carry a fiduciary duty to regularly and consistently monitor the P3, PEP, service providers (particularly the PEP's 3(38) investment manager) as well as any changes in services or fees that might adversely affect plan participants.
The 'One PEP-Pony' marketing conundrum
If plan sponsors have a duty to prudently select service providers through a well-documented vetting (RFP) process, is the same true when deciding to join a PEP? ABSOLUTELY! In fact, not conducting a prudent step-by-step process that includes vetting numerous P3/PEP candidates is highly imprudent and may land the adopting employer and their (fiduciary) advisor in hot water.
Many employers may be lured into joining a PEP that is sponsored by a payroll company or advisory firm due to slick marketing that purports to make joining and implementing their PEP easy and hassle-free. Employers and fiduciary advisors must avoid such schemes. Remember, a fiduciary's obligations, whether be it internal or external fiduciaries, begins with a "Duty of Loyalty" solely to plan participants.
How can any plan fiduciary show a duty of loyalty to participants if only choosing the first and only PEP option offered to the plan sponsor?
The 'right' way to choose a PEP
There is a right way to choose the best PEP option (or, deciding that a PEP is not the best option for their participants and sticking to a single-employer plan). The industry standard has been and continues to be to conduct a proper search and bidding process using an RFP questionnaire sent to several P3/PEP options.
However, selecting the right P3/PEP candidates from the more than 100 available options will be time consuming, so be prepared to spend ample time with the vetting process. It will be worth the time and effort.
A couple of reminders as you start the PEP journey:
- Document, document, document. Documentation is the plan fiduciary's body of evidence if ever called to account for their actions. Documenting starts with a making copious notes of why the employer may want to join a PEP. Documenting continues thru the RFP process, implementation of the PEP, and ongoing monitoring of the P3, PEP, service providers, etc.
- Seek third-party assistance. Even though the PEP market is new, the pooled plan arrangement market is not. There are several capable 'independent' resources available to assist advisors and employers in both the vetting and ongoing monitoring duties associated with PEPs.
Taking the time and effort to choose the 'right' PEP option can be a WIN-WIN for the adopting employer, their advisor, and most importantly, plan participants.