Things I Worry About (20): Pooled Employer Plans and DOL RFI (1)

Key Takeaways

    • The DOL has issued guidance about PEPs—pooled employer plans—that provides tips for adopting employers and questions about PEPs and a possible fiduciary safe harbor for small employers who adopt PEPs.
    • In addition, the preamble to the guidance includes some interesting information about the development of PEPs.

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)

This first article in the series discusses some of the information about PEPs included in that guidance. To quote from the release:

In advance of this RFI, the Department analyzed 2023 Form 5500 filings because these reports were the first to require new information about the number of participating employers in a PEP. While the 2023 Form 5500 data may not be fully complete, it does include all PEPs that filed a 2022 Form 5500 and reported more than $100 million in assets and offers a reasonable dataset to assess the nascent PEPs marketplace.

Comment: For context, the first year that PEPs could be adopted was 2021, so the DOL is looking only at a few years data.

The PEPs market was highly concentrated according to the 2023 filings. The 12 largest PEPs identified by assets under management held nearly 70% of all PEP assets and the 4 largest PEPs held more than 40% of all PEP assets. However, upon review, the Department found that these 12 PEPs show a diversity of business models and serve different kinds of employers.

Comment: While a fairly large number of PEPs have been formed, only a limited number had accumulated large amounts of assets. This suggests that a key for PEP “success” is distribution. In other words, and as with many new types of plans (or services or products), PEPs need to be “sold” in the sense that there needs to be a person explaining the benefits of this new type of plan. Although not discussed in the release, I have heard of other PEPs that have little in the way of adopting employers and assets. I believe that is because the PEP either lacked a defined distribution system or the advisors or agents were not educated on the benefits to them and to employers of adopting a PEP.

For example, the largest of these 12 PEPs held $1.68 billion in assets in 2023 but only served 63 employers and approximately 56,000 participants. The next largest PEP as of 2023 held $1.08 billion in assets but served 33,773 employers and approximately 538,000 employees.

Comment: I find these numbers to be surprisingly good for just a few years. Just think about it…in only a few years these two PEPs have each accumulated over a billion dollars.

Another way to think about it is that these PEPs have been adopted by almost 34,000 employers and covered, in 2023, almost 600,000 employees. That suggests that there are 34,000 fewer individual plans—either because those plans were merged into the PEP or because new individual plans weren’t formed because those employers adopted a PEP as their first plan.

I also think the diversity of the successful PEPs is interesting. Looking at the two largest PEPs, one had 63 adopting employers with an average “plan” size of about $27 million, while the other had 33,773 employers with an average “plan” size of about $32 thousand  (obviously new start up plans…I imagine that the assets of those adopting employers have grown since then). So, the PEP arrangement has been successful at both ends of the spectrum…larger plans and very small plans.

The DOL release is based on 2023 date…but to give you some sense of the growth since then, the PEP with $1.68 billion in assets at that time announced earlier this year that the PEP has surpassed $5 billion in assets.

A few years ago, in a speech to plan advisers, I said that, in 5 to 10 years, it was possible that half of the new plans would be in PEPs. I stated that dramatically because I wanted to emphasize the potential for PEPs. While it is impossible to make exact mathematical predictions about the future, it is possible that a very large number of employers adopting their first plans will be in PEPs. (As Warren Buffett famously said, “I’d rather be approximately right than precisely wrong.”)

More broadly, the average number of participants per participating employer in each of these 12 PEPs ranged from 16 to 884, with half of the PEPs serving employers that averaged at least 188 participants per participating employer.

Comment: When the PEP provisions were first adopted, the prevailing view was that they would be used by small plans. As is often the case, that was not the full picture. (Or, as Warren Buffet has also said, “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future”, and yes, that applies to me as well.) As it turns out, the reality is that a significant number of employers who sponsor individual plans have merged those into PEPs. For example, some of the PEPs described by the DOL have hundreds of covered employees. It is highly likely that those companies already had a plan.

Many of these PEPs appeared to be delivering on Congressional intent by offering diversified investment lineups at a lower cost than small plans could likely negotiate on their own behalf. For example, Morningstar finds that the median total cost for each participant in a small retirement plan is 84 basis points, accounting for likely investment expenses and other administrative costs charged directly to participants. In contrast, based on the same data source, the Department estimates that the total costs to participate and invest through one of the three largest PEPs reviewed were between 23 and 42 basis points for a typical participant in 2023.

Comment:  This is a bit of an apples and oranges comparison. The adopting employers of the largest PEP are fairly large and the data for that PEP should not be compared to the Morningstar data for small plans. Let’s assume that the 23 basis point expense PEP was that one. And, to make this easy, let’s assume that, for those of the 12 PEPs reported by the DOL, the ones will small plans had an expense ratio at the high end…42 basis points. Well, if that is accurate, it’s still pretty inexpensive. While we don’t know the details (e.g., index vs. actively managed funds), it still appears that a 42 basis point expense ratio for a start-up plan is inexpensive.

In fact, some of these 12 PEPs 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:  So, part of the reason for the lower costs is that these 12 PEPs, or at least some of them, are using CITs instead of mutual funds. However, there must be other sources of savings that aren’t identified by the DOL. (Note that the DOL numbers refer to total plan costs, which would include both investments and administration.) This is the first report of meaningful data on costs of PEPs that I have seen. It would be helpful to have more detailed data. That should come in the not-too-distant future.

Concluding Thoughts

In my view, it would be a mistake to dismiss this information. It is  clear that PEPs are appealing to some employers. I believe that they will continue to gain acceptance. However, the key will be whether a PEP has distribution and as a part of that, a clear understanding of the services and compensation of the advisors who recommend the PEPs. Obviously, some have solved that puzzle.

None of this should be view as a death knell for individual plans. PEPs are an arrow in the quiver of advisors….and individual plans are too.

More to come on PEPs in my next article.

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.

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