ARA Points Out Potential PEP Issues to EBSA

The American Retirement Association (ARA) has provided the Department of Labor with some comments on dealing with potential issues regarding pooled employer plans (PEPs).

The June 9 letter to Jeanne Klinefelter Wilson, Acting Assistant Secretary of Labor the Employee Benefits Employee Benefits Security Administration (EBSA), provided a series of considerations involving possible service arrangements and proposed fee structures, as well as what the covered transactions might be under potential exemptive relief.

The ARA chose to provide suggestions now, so the department may begin its consideration of specific issues, as the effective date for PEPs—included in the Setting Every Community Up for Retirement (SECURE) Act—is now less than eight months away. 

The issue, writes the ARA, is that “potential pooled plan providers (PPPs) and other providers of services to PEPs would like to confirm that they are able to provide services for compensation to a PEP under ERISA’s prohibited transaction rules and, to the extent there is a question, obtain exemptive relief to ensure their ability to do so”—with an objective in mind to permit the PEP to operate in a manner that best serves its participants’ and beneficiaries’ interests.

The ARA outlines five scenarios in which a Pooled Plan Provider (PPP)—an entity that provides/administers a PEP—and thus might act as a service provider:

1. as plan administrator, for a fee;
2. as a service provider for a fee, with delegation of the provision of the services to third parties; no additional fee charged;
3. as a service provider for a fee, with delegation of the provision of services to third parties and pass-through of third-party fees;
4. as a service provider and 3(38) investment manager; and
5. as a service provider, 3(38) investment manager and provider of managed account services.

“The provision of services by the PPP, and by any third-party service providers, should be exempt from the prohibited transaction provisions of ERISA Section 406(a) through the exemption for services under ERISA Section 408(b)(2),” the ARA explains. It adds that under DOL regulations, ERISA Section 408(b)(2) does not provide exemptive relief from the fiduciary self-dealing and conflict of interest prohibitions of ERISA Section 406(b).

“The question is whether a PPP’s decision to offer its services for fees it sets itself, or to select itself to provide additional services to the PEP for additional fees, would constitute fiduciary self-dealing in violation of ERISA Section 406(b)(1) for which no exemptive relief is currently available,” the letter says.

Assuming there are potential fiduciary self-dealing issues, the ARA writes, specific issues concerning functioning of PPPs could be addressed by exemptive relief that requires:

• Full disclosure to the adopting employers of the fees the PPP and its affiliates charge for services to the PEP, including (to the extent applicable) 3(38) investment manager services and managed account services, consistent with ERISA Section 408(b)(2) disclosure requirements.
• Approval of fees at the time an adopting employer adopts the PEP.
• Advance notice to each adopting employer of any increases in fees that may go into effect by “negative consent,” with the effective date of the increase not sooner than 30 days after such notice has been provided—as long as, if an adopting employer objects to the fee increase, the adopting employer must be given at least 60 days to terminate its participation in the plan (unless it is possible to immediately terminate particular service, if that can be done without terminating plan participation) without penalty and without being charged the increased fees, and the PPP must cooperate in good faith to facilitate the adopting employer’s termination.

“Ultimately,” writes the ARA, “the goal would be to ensure that the PPP—through itself, its affiliates and/or third parties—is able to provide the services necessary for the PEP to meet its objective of offering a meaningful retirement savings vehicle to the employees of the adopting employers, for reasonable compensation to the PPP and other service providers, without undue limitations that could affect the viability of the PEP alternative or, even if the PEP is still viable, the scope and quality of the services and investment options available to and through the PEP.”

The letter is available here.