This series of articles examines the DOL’s July 29, 2025 release that includes interpretative guidance on PEPs, solicits information about PEP practices, includes tips for selecting PEPs, and discusses a possible fiduciary safe harbor for adopting PEPs. 2025-14281.pdf (SECURED).

The first article in this series, Things I Worry About 20, discussed some of the DOL’s findings when it reviewed 2023 Forms 5500 filed by PEPs. This article continues the discussion of those findings. In the preamble to the guidance and RFI, the DOL said:

In fact, some of these 12 PEPs [that is, the 12 largest PEPs at that time] have gathered enough assets to access investment types that would typically be inaccessible to small plans, such as collective investment trusts (CITs) and separately managed accounts. These CITs are almost always cheaper than similar, or even identical strategies, offered as registered open-end mutual funds. A 2023 report by Morningstar found that retirement plans with less than $25 million in assets held less than 10% of their assets in CITs. In contrast, more than 40% of the largest 12 PEPs’ assets are held in CITs; however, 5 PEPs held no CIT assets at all. Of the 7 PEPs holding CITs, the median percent of assets in CITs was 65%, but the minimum was just 1% of assets.

Comment:  It makes sense that plans with larger amounts of assets (and I believe that all of the 12 PEPs had over $100 million in assets—and two had over $1 billion), would have access to lower cost share classes of mutual funds and CITs. However, I wonder if the quoted language isn’t misleading in the sense that many smaller plans do have access to CITs and, in some cases, may have access to low-cost mutual fund share classes. While I don’t have the information to confirm this, I wonder if the reason is that higher cost share classes are used by smaller plans so that revenue sharing can pay the costs of operating the plan…which in the case of a small plan is higher on a per capita basis than for a large plan.

The discussion continues:

Most—although not all—of the 12 PEPs we examined offered limited investment lineups that appear to be designed to be accepted in their entirety by participating employers. These lineups generally covered major asset classes without overwhelming participants by offering overlapping or arcane designated investment alternatives. (These limited lineups could also help PEPs gather enough assets in specific pooled investment strategies to gain the scale necessary to lower costs for participants.) The median number of funds offered by these PEPs was 17 designated investment alternatives, not including target-date funds (TDFs).

Comment: Again, I am concerned by the suggestion that smaller plans would have more investments than 17 funds in addition to the target date fund suite. My experience is that few smaller plans have more than15- 20 individual asset class funds, above and beyond the TDFs. My experience may be too limited, though. However, I haven’t seen what the DOL suggests in happening in smaller plans. On the other hand, it is good news to see that the professionals who run PEPs—at least the most successful ones—are offering investment lineups that inexperienced investors have a chance of understanding.

The DOL discussion goes on to say:

All but one of the largest PEPs offered TDFs, and collectively participants invested the majority of their assets in these vehicles. Fifty-eight percent of assets among the largest PEPs were invested in TDFs. TDFs can be a simple way for plan participants to reasonably manage the asset allocation of their investment portfolio. The 12 largest PEPs hold a greater proportion of assets in TDFs than is true of the plan universe more generally. EBSA estimates that about 30% of 401(k) plan assets are held in TDFs as of 2023. Some of this difference may be due to the fact that some legacy plans did not offer TDFs or automatic enrollment in the past. Nonetheless, those PEPs that the Department reviewed appear to be successfully channeling participants into simple, low-fee TDFs, which can help participants who do not wish to set their asset allocation mix themselves and do not use a managed account or other advisory service.

Comment:  It is striking that 58% of the assets in these PEPs are in target date funds. And it is good news that so many participants have well-diversified, age-appropriate “portfolios.”

The DOL continues:

About half of the 12 largest PEPs that the Department reviewed seemed to avoid investments offered by parties in interest (sometimes referred to as ‘‘conflicted investments’’). Seven of the 12 largest PEPs entirely avoided party-in-interest investment strategies (i.e., investments offered by the pooled plan provider or an affiliate) according to Form 5500 filings. Of the other PEPs, 29% of their assets were held in party- in-interest investments, and two of these 5 PEPs exclusively held party-in-interest investments.

Comment:  Kudos to the PPPs of the 7 PEPs who have no proprietary investments in the plans. While it is not necessarily imprudent for a PEP to have investments that are managed by the PPP or an affiliate, it is something that adopting employers should consider before joining a PEP. The question is, are those investments in the lineup because they are superior choices or because they are proprietary and additional fees will be earned? If the 3(38) manager who selects the proprietary investments is not related to the PPP, that question will be easier to answer—since the 3(38) operates as an ERISA fiduciary with a duty of loyalty to the participants. However, if the 3(38) investment manager is related to the PPP and the investments are proprietary, adopting employers should consider the conflict and determine if their participants’ interests are adequately protected. Again, it is not necessarily imprudent, but it is something for adopting employers to consider. Closely related to that is the issue of monitoring the investments. Under what circumstances will the PPP or the 3(38) remove affiliated investments if they are no longer prudent choices?  Adopting employers should ask that question and receive a satisfactory answer.

Although not discussed by the DOL, adopting employers should also make sure that they understand their fiduciary responsibilities for the investments. In some cases, the PPPs will appoint a 3(38) investment manager to select and monitor the investments. In that case, the adopting employer will not be a fiduciary for that purpose. In other cases, though, the 3(38) investment manager will have individual agreements with each adopting employer, as opposed to the investment manager being appointed by the PPP. In this scenario, the adopting employers are responsible as fiduciaries for the selection and monitoring of the 3(38) investment manager. In that case, the adopting employers should regularly gather information about the investment manager and prudently review it and decide whether to retain or terminate the investment manager. Because of the structure of PEPs, a termination decision on an investment manager will likely be tantamount to a decision to leave the PEP.

Concluding Thoughts

My last article discussed the DOL findings on the growth in popularity of PEPs. This article is about cost efficiencies and investment practices in PEPs.

In both cases, I think that PEPs can properly be called a success. However, that does not mean that employers can blindly adopt a PEP. There is a fiduciary responsibility to evaluate the PPP and other named fiduciaries. My next article will look at DOL guidance on that subject.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.