DOL provides guidance on PEPs – Part 2, tips for employer-fiduciaries

In this article we continue our review of DOL’s recent PEP guidance, summarizing and commenting on DOL’s “Fiduciary Tips for Small Employers Selecting a PEP.” We begin with a brief discussion of the policy “themes” of DOL’s guidance.

Themes

By way of introduction, these are “tips,” not actual regulations – their legal status is unclear, but they do give an indication of how DOL sees the policy underlying the PEP project. Because these tips represent extremely informal guidance, at best, employers considering following them should seek appropriate guidance from advisers and counsel.

We identify three “big” themes in the tips:

• Providing scale to small employers. DOL clearly views PEPs as a way to bring economies of scale to small employer DC plans – the title of its guidance is “Pooled Employer Plans: Big Plans for Small Businesses.” Generally, the idea is to bundle small employer assets and administration.

• Limiting fiduciary exposure/liability. DOL’s guidance is intended to make the project (of bundling smaller plans into large-scale PEPs) easier by laying out a roadmap for PEPs pursuant to which the pooled plan provider takes responsibility for investment (thus relieving the small employers of that responsibility). The pooled plan provider may (in turn) delegate that responsibility to an independent 3(38) investment manager.

• Reducing litigation/developing safe harbors. Another goal – which we’ll discuss in more detail in our next article, on DOL’s request for information – is to reduce the possibility of PEP-related litigation through clarifying regulations and possible safe harbors.

Fiduciary Tips for Small Employers Selecting a PEP

With that background, here is a summary of DOL’s PEP “tips” plus some commentary (note that the “you” in these tips is the small employer):

Consider what a PEP has to offer you and your employees. PEPs can offer

• Professional management

• Economies of scale – critically in reduced investment management fees

• Outsourcing of administration, saving management time

2. Make sure you understand the type of PEP under consideration. There is a lot of variety – critically with respect to standardization vs. flexibility and the allocation of fiduciary responsibilities.

3. Make sure you consider the experience and qualifications of the PPP. Check for client satisfaction, prior litigation and enforcement actions, and appropriate size/capabilities.

4. Make sure you ask questions about the PEP’s fees. We noted in our prior article that fees are the litigation target. We quote this “tip” in full (again):

Operating a PEP involves services such as trustee services, custodial services, recordkeeping, audits, and other administrative services. Fees for these services are often quoted on a per-participant basis or based on the level of the employer’s assets in the plan, or a combination of the two. There may also be start-up fees. It is important to understand all the fees and expenses that will be charged by the PEP and how they will be allocated among participating employers and their employees’ accounts. Examples of relevant questions include asking the pooled plan provider for a breakdown by service of all the fees and expenses associated with joining the PEP. Also relevant is a breakdown by service of how much the pooled plan provider (and any affiliate) gets paid and who approves these fees and expenses. Another relevant question is whether the pooled plan provider receives any compensation from third parties in connection with the PEP, and whether it uses the data from participant accounts for cross-selling activities.

5. Make sure you understand the investment options. Good administration and competent investments are the key to a good PEP.

• What are the investment options and (in that regard) how much flexibility do you need? What are the limits on investments available?

• An appropriate default fund (e.g., a target date fund) is critical.

• A typical plan fund menu will include (in addition) a diverse set of “core funds” and (possibly) a brokerage window.

• How do the PEPs investments perform relative benchmarks?

6. Ask questions about your exposure to fiduciary liability for investments. As we discussed in our prior article, there are two different approaches to the allocation of responsibility for investments:

Alternative 1: Selection of investment options by the employer – under this approach, the employer (as fiduciary) would be responsible for constructing the plan’s fund menu, although its choices may be limited by the pooled plan provider. In discharging this duty, the employer would be subject to the same fiduciary rules (and litigation exposure) as it is under a single employer DC plan.

Alternative 2: Selection of investment options by a fiduciary designated by the pooled plan provider – as DOL explained, under this approach, “the risk to participating employers of fiduciary liability could be minimized greatly if the pooled plan provider, as named fiduciary, expressly assumed full responsibility for, and exercised sole discretion and judgment in selecting and retaining the [fund menu investment] manager and did not attempt to reduce its responsibility by relying on authorization or ratification from the participating employers for the selection and retention, such as through an adhesive participation agreement.”

7. Ask questions about your exposure to fiduciary liability should you join the PEP. Check for any disclaimers of liability/responsibility and “whether the PEP’s governing documents put any fiduciary duties on you.”

8. Don’t forget to monitor your PEP on an ongoing basis. Quoting DOL: “at reasonable intervals you should review the operations and performance of the PEP, including performance of the investments, to make sure it is operating the way you expected it to.”

9. Make sure you fully inquire about the implications of exiting the PEP. What happens if you or a (terminating) employee ceases? Are there any exit restrictions? Does any investment include a “market value adjustment” on distribution? What happens to forfeitures? If you withdraw from the PEP, do current accounts stay in the PEP?

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In our final article on this topic, we will review issues raised in DOL’s request for information that focus on fiduciary litigation exposure.