Patrick Hayes:
Good afternoon everyone for those that are joining us for today's webinar on pooled employer plans. We're very excited to have you with us, we have an incredible list of speakers to go through today as we get to talk about some of the background and benefits of the new SECURE Act legislation and its effect on the pooled employer plan space. With that, I'd like to introduce some of our guests today.
Patrick Hayes:
We have with us Terry Power of The Platinum 401(k). Terry has nearly four decades of experience in the retirement plan industry and is a frequent thought leader on all things multiple employer plans. He's a frequent speaker at different retirement plan conferences, and quoted in many of the nation's leading publications. He's also provided testimony to the United States Department of Labor and the IRS regarding multiple employer plans and pooled employer plans, and is really a welcome guest here to share his expertise.
Patrick Hayes:
I'd also like to welcome Phil Scott. Phil has nearly three decades of experience in the retirement plan industry, 12 years as an advisor formerly with City Street as a retirement director, and 15 years of direct experience working with multiple employer plans, both in the onboarding and design phase, as well as the employee education, and is responsible for plan education workshops and has extensive background in the plan merger and acquisition procedures that's all involved in this space.
Patrick Hayes:
Finally, I'd like to introduce Steve Day. Steve is a partner with Calfee, Halter & Griswold here and my colleague. He supports the firm's employee benefits and executive compensation practice. He advises public, private, government, and nonprofit clients on tax, securities, ERISA, and other state law issues, and was recently ranked by Chambers USA as a leading lawyer in the employee benefits and executive comp space.
Patrick Hayes:
We have an excellent panel of experts with us today. Let's get started by going through the agenda. So first, we're going to describe a little bit of background on the SECURE Act legislation and the seminal change that it represents for the plan industry. In particular, we're going to talk about many of the new benefits that will become for pooled employer plans. We'll get into the design and construction of a PEP, and how in that design and in that construction, you can really build and customize a plan ultimately to provide the best ultimate experience for both your company and its participants. We'll get into talking a little bit about the due diligence of the adopting employers and service providers that may be involved in the pooled employer plan. And then finally, we will circle back to really the ongoing monitoring and supervision involved in the plan, and the different types of services that it provides.
Patrick Hayes:
Just a bit of housekeeping. Folks should feel free, throughout the presentation, to please submit questions that you may have as we cover the different topics. But we will likely save the majority of those questions for the end, and we'd be happy to help answer those certainly after today's presentation as well.
Patrick Hayes:
Terry, I know given your introduction that you were really heavily involved in the SECURE Act legislation that was passed last December, and I was hoping that maybe you could provide us with a little bit of background on the bill and just really how it changes the plan industry landscape.
Terry Power:
Sure. I appreciate that, and appreciate the invitation to participate in the webinar. The SECURE Act was the latest rendition of several changes that were attempted to occur over the years. The Retirement Enhancement Security Act, a few other bills that died in Congress, the SECURE Act was passed by partisan through the House and the Senate in early 2019, languished there until the second week in December, when suddenly, all of a sudden it was taken up and was added to the budget bill, and was signed into law on December 20th.
Terry Power:
It really is a monumental change, the first real significant change we've seen in retirement plan laws in almost a decade. Broad changes, the main benefit of these programs, the intent was to increase coverage to smaller employers. A large segment of our working population does not have access to a qualified plan. The SECURE Act hopefully will engage employers to have an easy way to go ahead and implement a retirement plan for their employees. I want to point out the strong support from Senators Portman and Cardin. They've been leaders in Congress over the years as far as moving through significant retirement plan legislation.
Terry Power:
The biggest issue that came out of the SECURE Act is the establishment of pooled employer plans, you'll hear us talk about PEPs. A pooled employer plan is basically a derivative of multiple employer plans. Those programs have been around since the 1950s. PEOs, employee leasing companies, were required to use those types of programs beginning in 2002 under an IRS [inaudible 00:05:19] that came out. Some of the issues associated with them that presented some problems was the one bad apple issue, where in theory, if you had one employer in a multiple employer plan that did something very bad, [inaudible 00:05:33] plan could be disqualified. That's not the case anymore. The SECURE Act eliminated the one bad apple issue for adopters in a pooled employer plan. These PEPs go live January 1st, 2021, about 136 days or so, the clock keeps ticking.
Terry Power:
The benefit on the PEPs, which is different than a regular multiple employer plan, is that the adopting companies do not need to be affiliated or otherwise have a nexus or commonality in order to adopt onto a program. And that's a big change. A closed multiple employer plan, such as a PEO, or such as the American Bar Association, they're all tied in together, they a nexus or a commonality that ties in. That's not required under a PEP, and it opens up some pretty interesting opportunities, as you're going to see as we move forward here. Next slide there. There we go.
Terry Power:
Under a PEP, what it really is, it's an outsourcing of many of the duties associated with overseeing a 401(k) plan. The program itself is established by a pooled plan provider. We were calling those PPPs until we had the CARES Act and we had the [inaudible 00:06:46] check protection, so we call them P3s now. So P3 is actually the sponsor. They administer, they establish the pooled employer plan, and they assume responsibility as the plan administrator under risk Section 316. It's actually a new layer of plan administrator under the statute. The PPP is responsible for handling the audit and the Form 5500 filing responsibilities.
Terry Power:
Very important issue with the pooled employer plan is that there's only one global audit and one global 5500. You could have literally hundreds of adopting employers in a pooled employer plan, you would only have one audit and one 5500. I know we're chatting a bit about private equity firms in terms of portfolio companies, and what are they doing? In most cases right now, individual portfolio companies will have their own 401(k) plan, will have their own assets, their own pricing with their record keeper, they'll have to file a 5500 and have a plan on it. Under a PEP, all these companies could be consolidated under one pooled employer plan, gain leverage associated with consolidating assets together for pricing discounts and incentives, and also only have one audit as opposed to maybe 10 or 20 audits with a significant cost savings. A typical 401(k) audit runs anywhere from $7,000 to as much as $20,000 or $25,000 every year, and that's required if the employer has more than 120 employees that are eligible to be in the plan. So it's very significant.
Terry Power:
PEPs can also be structured to have tailored investment options, and also have flexible plan design, where each of the adopting employers does not have to have the exact same structure. One program might have a safe harbor contribution, one might have a discretionary match or a profit sharing. They can all vary and they're all tested individually. Then that bottom line is lower administrative and record keeping fees because we're aggregating, we're simply putting plans together on the economy as a scale and then you'll pick that up as being part of a larger pooled employer plan. It's a great opportunity.
Patrick Hayes:
Yeah, and you know, I want to kind of take a pause here as we even go to the next slide, and touch on something that you mentioned, but that I think is really significant and may be one of the most material changes in the new plan laws and what you're able to do, specifically around both the nexus and the one bad apple rule. Previously, those were two large prohibitions, I think, to people wanting to get involved in a, formerly called a multiple employer plan. But what's different about a pooled employer plan, I think, is that ability to really combine with any company without any nexus requirement, and the ability to potentially kick out a bad actor. Is that right?
Terry Power:
Good point. Exactly. In 2012, the Department of Labor issued Advisory Opinion 2012-04A, I believe. Ruined my Memorial Day weekend when they came out with this. They basically came out and said, "If you are in a multiple employer plan," because we were seeing these as a tremendous benefit for employers. "If you are in a multiple employer plan and you don't have that nexus or commonality between the adopters, that's fine, but each of the adopters is treated as a separate plan sponsor for recording purposes." Meaning that each employer would have to file their own 5500, they'd have to have their own ERISA bond, and if they were subject to an audit, they would have to have an audit. So you could have an open multiple employer plan with 50 adopting employers, and you would have 50 5500s and also 50, potentially, audits associated with that PEP.
Terry Power:
Now, totally different situation with the pooled employer plan where you only have one audit, regardless of the number of adopting employers, and that audit doesn't kick in until the PEP crosses 1,000 eligible employees, notwithstanding one adopting having more than 100. So you could have a PEP made up of 20 different companies that each had 20 or 30 employees that were eligible. That plan would not have an audit requirement even though it could have 6 or 700 employees. There's a big difference there, there's only one ERISA bond required globally for the overall pooled employer plan. This requirement is a big deal and the audit requirement, obviously, is huge and a dramatic cost savings.
Patrick Hayes:
Yeah, even separate from some of the technical benefits that you've described, I really like the bullet that you put in on the bottom of this page, and I think it's something, certainly, for any of the senior executives, particularly the CFOs or COOs that we may have on the call that are intimately involved in the operations of the finances of a company. What have you seen, kind of anecdotally, in folks that have these types of plans that are able to get set up, and then ultimately the kind of time, energy, money, resources that get saved by the senior officers?
Terry Power:
Yeah. The dollar savings can be significant because of asset aggregation. If you're a small 401(k) plan, let's say you've got $5 million in your plan, you'll get pricing from the record keepers based on 5 million. If there's 20 of you going to a record keeper, now you'll get pricing based on $100 million, so you're going to get better pricing, plain and simple. And that's just not on the investments, but also obviously the savings, potentially, on the audits.
Terry Power:
On the other part, really, is the operational savings, in terms of the time for senior officers, for the CFO, for the HR department, where they're taking their time out of their day to make sure the plan is being run properly. They have oversight requirements, they have regulatory requirements, fiduciary requirements. One of the drawbacks of the SECURE Act, if there is one, is the fact that it increased IRS filing penalties. If you have an incomplete or you do not file the 5500 in a timely manner, the penalty went up from $25 a day up to $250, maximum of $15,000 a year up to a maximum of $150,000. So it is fairly significant.
Terry Power:
The other part is the time associated with oversight. We were doing a first quarter review, which was late April of 2020, obviously in the midst of a major market downturn, and it really hit us at that point that even a global pandemic does not alleviate you of the fiduciary oversight and governance responsibilities you have as a plan fiduciary. It's something we take very seriously, and because the plans are outsourced to independent third party fiduciaries, we have [inaudible 00:13:09] time. This is what we do full time. So while employers might be more curious about whether their business was going to survive, or how the economic impact was going to change their company, we were able to go through and oversee the retirement plans for literally hundreds of thousands of participants and it's really that leverage that really is beneficial.
Patrick Hayes:
Right. We've got a list of the different benefits here. I know you've certainly talked about a great number of them. Was there anything here that you wanted to specifically point out or mention that we haven't already talked about, as we transition over to the plan design. I just wanted to make sure, yeah.
Terry Power:
These are all really valid points. I know you're going to have a copy of this available for the attendees to the meeting. The main issue deals with the internal pricing benefits, obviously, what's available. If you are a private equity firm with a portfolio of companies, each one of your portfolio companies has these requirements, and in terms of continuity, in terms of varying levels of expertise among all of those companies, there's no assurance on your part that these are being done properly. Again, one of the benefits of a PEP is that everything gets thrown together and third parties assume the fiduciary responsibility for oversight, and that's a big deal.
Patrick Hayes:
Thanks Terry, that's really helpful background, and I know certainly today's webinar and our ability to focus in on a lot of the advantages for folks in the financial services industry, particularly private equity firms, will be really salient for those in this audience. With all of those different benefits in play, I think it's also really important for our audience to understand how these pooled employer plans are really designed and built. And with that in mind, I'd like to maybe slide it over to master architect Phil Scott, who can tell us a little bit about the best way to try to construct these pooled employer plans.
Phil Scott:
That's great, thanks Patrick. I want to start, first of all, let's simplify and understand that a PEP, a pooled employer plan, runs under one plan document. So, simplifying that, when we're having conversations at the adopter level, so this would be an adopter, a company considering adopting into the pooled employer plan, one of the great messages out there is we're going to simplify that process. They're going to run under one plan document, which has a draft that's already been drafted for them. So we really start our conversation at the adopter level, Patrick, with the explanation of outsourcing. What does that mean? And as an outsourced adopter, you're basically outsourcing the sponsorship, the administration, as well as the trusteeship. So you're really putting as much of a silver bullet on as possible, outsourcing those duties, relieving yourselves of those fiduciary responsibilities.
Phil Scott:
The second piece, when we get into talking to adopters, is really focusing on who is running my plan? So we spend a lot of time talking about the P3, the pooled plan provider, as the 3(16) is the plan administrator. And that plan administrator is really centric to all the things going on around the pooled employer plan, and very intricate in the third party administration testing. All of the administrative role belongs to that pooled plan provider, so we really start the conversation with the idea of outsourcing, utilizing an adoption agreement, and about four or five new client documents underneath of one plan document. So it's a completely simplified process, as opposed to out there running your own plan as the sponsor administration and trustee.
Phil Scott:
We reiterate the important of understanding that you're outsourcing the responsibility of having an audit. If you're a large enough company, you're basically outsourcing the audit responsibilities to that pooled plan provider, to that P3. Also, one area that is always well-received. You no longer, as an adopter inside of that pooled employer plan, you no longer have the responsibility of filing the 5500. It's done for you, and that again lies at the P3 responsibility.
Phil Scott:
Of course, in every conversation with adopters, when we're bringing an adopter onto the pooled employer plan, we talk about the costs involved for the adopter themselves and then specific to the participants. So we really spend a lot of time making sure that the adopter coming in understands what their cost responsibility is going to be, and many times that's a much lesser expense than what they've been paying for on their own, running their own plan. Secondly, right behind that, is the responsibility to really disclose what the participant costs are. So we really focus on [inaudible 00:17:59] those conversations, and then always, we spend time around plan design.
Phil Scott:
And any time you are adopting into a pooled employer plan you have the flexibility of the spectrum of the plan document, but the adoption agreement is a narrowed scope where we can get into conversation around your effective date that you're going to come into the pooled employer plan. We're going to get into areas of eligibility, what time [inaudible 00:18:27] eligibility? Do you want specific hours required? Do you want to grandfather eligibility? Then we go into areas such as discretionary matching, safe harbor matching, safe harbor non-elective, profit sharing. We get into some of the areas of profit sharing and specific design formulas that may be more tailored to what you're looking to accomplish.
Phil Scott:
So the idea is that an adopter has the ability to have flexibility inside of the plan design, not just one size fits all. So the plan document is built to handle a very large spectrum of design, and within that we simplify the process utilizing that adoption agreement in a much more simple process.
Patrick Hayes:
Sure. One thing that strikes me, and maybe you can share a little bit on this, and it probably even leads into the next topic on doing some of that upfront due diligence. But talk a little bit about, if there was a new portfolio company that, my private equity firm or some other financial services firm, was looking to add, what is going to happen as part of that front end due diligence? What kind of legal or any ERISA compliance stuff might we need to get done? And then, maybe as a follow up, and I know we'll touch on this a little bit, too, but maybe even talk about a portfolio company's ability to stay in the plan or exit out of the plan.
Phil Scott:
Absolutely Patrick, great questions. One of the things when we're building design going forward, we want to look at where you've been in the past. So when we're bringing on adopters who have previous plan assets, they've had an existing plan in place. We want to look at all of the former documents, the plan document, the summary plan description, adoption agreement, all the testing reports. We do a diligence review, and working very closely with Calfee, to make sure, number one, that the former plan is in compliance and all of those documents are in place. And certainly we'll bring that to the attention of that adopter. It's great that we have the ability for Calfee to come in with their ERISA expertise whenever we need some of those documents looked at, and how the plan is being administrated a little closer. And I'll bow out here in a moment and let Steve, as the ERISA expert, really get into some of those details.
Phil Scott:
Relative to the question specific to the private equity side, Patrick, whether it's private equity acquiring a new portfolio company, we can jump in and assist on the front edge of that and take a look at that company being acquired. We can look at their documents and make sure, again, in working very closely with Calfee, that the company that you're purchasing as a private equity, as a new portfolio company, we want to make sure that their plan is being run in compliance and there's no liability there. If there's liability there, we want to vet that out early on, prior to the acquisition.
Phil Scott:
Fast forward four or five years, if a private equity is looking to transition a portfolio company out, they're selling them. As you all know on the phone that have expertise in private equity, that's been a challenge. We don't want to bring an adopter into a pooled employer plan and then have the difficulty to transition out, or what does that cost to transition out? Well, with SECURE Act and the pooled employer plan provisions, what's happened now, with the elimination of the nexus, that portfolio company that you are selling has the option either to stay inside of that current pooled employer plan, or they'll be able to move over to the Calfee pooled employer plan, or they can go to the new company that's acquired them. So they have some options, but the ease is very simple.
Phil Scott:
And again, Terry and I, we've been doing this for about 15 years. We have some companies that are out there as private equity portfolio companies, and so we've followed in that merger and acquisition process. We know that very well. And so, with a pooled employer plan, the elimination of the nexus, it's really made that transition, Patrick, very simple and really given some options to those portfolio companies that are being sold out of that private equity holder.
Patrick Hayes:
That's great, Phil, thanks. And Steve, building on Phil's point, I would really welcome to hear some of your thoughts on, as we are looking to bring on a new adopting company. Phil mentioned a few of the documents here. What other things are you looking at here? And then certainly, we can even talk about maybe the due diligence process in depth on the next [crosstalk 00:23:00] as well.
Steve Day:
Yeah, thanks, and thanks everybody for joining the webinar. Real quickly, I notice we're getting a lot of questions popping up in our Q&A chat. That's great, keep them up and we'll have time at the end to address this. One other thing I wanted to mention before I dive into my section here, because I know we have a lot of private equity attendees here. I just want to clarify, I'd be remiss not to clarify that when we're talking about multiple employer plans, we're not talking about multi employer plans, which can be a bad word in the private equity space. So multi employer plans are the union plans, the Taft-Hartley plans where there's a lot, there could be withdraw liability that everybody is conscious of. That is not the case here. Unfortunately, the people who wrote ERISA aren't very creative, and they have one type of plan that's called multi employer plans, which are those union Taft-Hartley plans, and then they have these, the multiple employer plans. I just wanted to point that out because that question comes up a lot with private equity clients.
Patrick Hayes:
That's a very good clarification, thank you Steve.
Steve Day:
I could see it coming up in one of the questions. So getting back to the due diligence process. Again, if you're an employer and you have an existing 401(k) plan and you want to join the PEP, unfortunately the IRS rules and the ERISA rules don't allow you to just terminate your existing plan and then start anew in the PEP. What you actually have to do is merge your existing plan into the PEP. And so, because of that the PEP and the pooled plan provider have to take some extra due diligence and caution to make sure that they're not adding plans that have qualification problems under the code, or operational fiduciary issues under ERISA. And so, our role, working along with Phil and Terry, is to scrub the plans and make sure that we vet them and that they're meeting the qualification requirements. And we'll take a high level overview of operational issues as well to make sure that the plans are up to date, compliant with the tax code regulations that are required for qualified retirement plans, and that there's no red flags about operational issues or anything like that. So [crosstalk 00:25:55].
Patrick Hayes:
Oh, sorry. Steve, I was just about to ask you about some of those red flags. If you see an employer that maybe has an issue that has occurred in the plan's past, what additional steps might need to be taken in order to help cure them?
Steve Day:
That's actually where we would come in. We would review, again, a lot of the documents that were listed on the previous slide. And if we do spot any issues, there are actually correction programs, both under the IRS and the Department of Labor, so if it's a qualification issue or... For example, if the plan hadn't been amended in previous years, then there are correction programs with the Internal Revenue Service. If there are any sort of fiduciary issues, like late contributions, things that are on an operational scale fiduciary-wise, we can go through a Department of Labor's correction program. So let me... Can we back up? I'm sorry but let me just sort of walk through what we would do, and then we'll get to what we would eventually do if we spot a problem.
Steve Day:
When we go through the diligence process, we're going to be looking at the plan documents, adoption agreements, making sure that they're meeting the IRS qualifications. Looking at summary plan descriptions. Are they up to date? Are they consistent with the plan document? Financial statements and audit reports, so if your plan is big enough, required to do an audit, we'll read through the audit. Non-discrimination testing, if you have to do non-discrimination testing for you plan we'll want to take a look at some of those results and see. If you're not passing, are you correcting it through the year? Form 5500s and other regulatory filing, we'll take a look through that. See if there's any red flags that come up, and your self-reported fiduciary issues or anything that might seem off between what the plan document says and what's being reported on the 5500. Of course, if there's any correspondence between the IRS or the Department of Labor, or any other agency, we'll want to take a look at that. Participant communications, if you're a safe harbor plan are you sending out the safe harbor plan notices? Other types of communications that are required. And then, of course, board and committee records for anything related to the plan administration or adoption. So if you're amending the plan, has the board approved the amendment? Various things like that.
Steve Day:
So, getting back to what happens if we spot a red flag? What happens if we spot a problem? Then there are a couple things you could do. You could, like I mentioned, go through a formal correction process with the IRS. Now that's only for what I'd characterize as the big operational failures, where you need to get the IRS to sort of bless your correction. There are other types of errors that could just be self-corrected, and we have a lot of experience helping clients sort out what can be self-corrected versus what we should probably go to the IRS for and get their formal blessing through a correction program.
Steve Day:
I should point out that there is legislation that might be coming out soon, within the next year or two, that's going to expand the self-correction abilities, so it might be easier down the line just to self-correct rather than having to do it through the IRS program.
Steve Day:
And so, if we spot anything and we make a recommendation that something needs to be corrected before the plan can join the PEP, then the plan sponsor would have the opportunity to either engage Calfee to help them with that filing requirement with the IRS or the Department of Labor, or they could go to their own attorneys or ERISA attorneys that they typically use. And then we'd, of course, help along the way. And, of course, if we are engaged to help out, we'll help with any board or committee actions, any sort of amendments that would be needed, and any of those filings with the IRS.
Steve Day:
And then, once we're content that any sort of red flags or operational issues have been corrected, then we'd be able to move on to the merging it into the PEP.
Patrick Hayes:
That's great. Thank you for that background, Steve. That's actually a perfect segue because you mentioned talking about how the plan sponsor might have some decisions to make as they're looking to bring on those different company plans. With all that front end work getting done, Terry, I'd like to pitch it back to you, maybe, with a question and to talk about how the ecosystem of the pooled employer plan works and how some of those different service providers, certainly we've mentioned a few. The Platinum 401(k), your group, Phil's group, who could help with plan design. Calfee, doing some of that ERISA compliance and due diligence, but who are some of the other players involved?
Terry Power:
Great question, and these questions that are coming in are excellent too. We'll address those. The pooled plan provider is the organization that establishes the plan. The Department of Labor will be releasing, literally any day, the rules of the road for the P3, the pooled plan provider. Who can do that, who can not do that. If you have a conflicted situation where, for instance, an investment management company, it appears, is not going to be allowed to be the pooled plan provider of a plan that they actually do investment work for, that [inaudible 00:32:19] some input from the Chairman of the Ways and Means Committee and he's got a fair amount of leverage in Washington, so I think that's probably going to be included in the final rules.
Terry Power:
So you have a pooled plan provider, the P3, that will establish a pooled employer plan. The other parties to that program will be the investment manager, that's an ERISA 3(38) investment manager, an outside entity not affiliated with the pooled plan provider. That investment manager takes on the duties of actually funds selection and monitoring, establishment of the investment policy statement, it will set the qualified default investment alternative, the QDIA, and they will be monitoring the funds on an ongoing basis for suitability, for expenses, verifying everything's in line, doing benchmarks. They control and they assume full responsibility and liability for virtually everything associated with fund selection and monitoring.
Terry Power:
There's not many absolutes in ERISA. One of the absolutes are, though, if you're a 3(38) investment manager, you have all that responsibility and fiduciary heat, if you would, on you. And that 3(38) is actually hired by the pooled plan provider, by the P3, so the client doesn't have to engage them, so they don't have that engagement oversight liability of making sure that they're doing the job, because that liability falls onto the pooled plan provider.
Patrick Hayes:
And that's certainly a big change, isn't it, Terry? Yeah, I think previously, for those people that certainly are familiar with maybe running their own company's plan that may be on the phone today, even if you were already outsourcing some of those duties before, a lot of that risk and fiduciary liability of service providers you select would have fallen on you. Now, they're able to offload a lot of that risk and liability. Is that right?
Terry Power:
That's correct. Because the companies are not actually even hiring the manager. If we're, in our PEP that we're running, we serve in that capacity and we engage them, and this is something we've been doing for about 10 years. We're actually the industry's most experienced 3(16) plan administrator for multiple employer plans. The second part deals with record keepers, the actual record keeper that handles the day to day work associated with the investments. Money in, money out, quarterly statements, online systems. They can either be on a bundled basis, where you have a record keeper like Voya or Mass Mutual that does bundled administration, or, in a TPA mode, we're using a third party administrator. We are a TPA, we're a 20 year old firm that does third party administration, but we don't have to be the administrator. We can actually interface with our 3(16) services as part of a pooled employer plan with a bundled provider.
Terry Power:
Strategic Capital Advisers, again they're involved with plan design and participant education, the onboarding of the groups. Verifying that the education work is being done properly. And again, due diligence and compliance, there's always issues that come up in qualified plans. ERISA attorneys are great, we've been working with them for almost four decades and they can fix a lot of problems.
Terry Power:
One of the questions that came up just mentioned if you had a non-compliant adopter, this is dealing with adopter who didn't pay their contributions on time, what can happen there? A couple things, and it's an important point. When an employer adopts into a PEP, or into a MEP, they also give us the authority, at our discretion for any reason, to go through and throw out. To de-adopt them at any time. And we don't have to hit a certain threshold or level that allows us to do that. If we just decided, "We don't want you in here anymore, we identified a problem," we can then isolate it by spinning them off into their own single employer plan. They give us the ability, the right to do that when they adopt on the plan. And once they're isolated from the plan, then the ERISA team at Calfee can go through and deal with the different programs available through the IRS or the DOL to rectify the situation. But regardless, they're out of the plan at that point.
Patrick Hayes:
Yeah. So all of this, kind of taking everything together as a whole, it seems like there are some stark differences between how people were able to approach even this pooled employer plan space previously, in comparing the old model against the new model. Maybe walk us through again, and again this is kind of a nice synopsis of how folks would have had to have approached this issue previously, Terry, and then now. And Phil, feel free to chime in here, too, maybe pitch in on a couple of these points as well. But for you and Terry, from the old model to then, we'll kind of talk about how they're able to really offload a lot of that risk and liability with the new model.
Terry Power:
Sure. Yeah, in the old model, for the most part each of the portfolio companies would come aboard. They'd have their own 401(k) plan with varying levels of expertise and administrative compliance associated with the operation of that plan, and it would just continue on going forward. The ongoing administration and maintenance, the audits, the 5500, the various record keepers, it was all very fragmented. There was no continuity associated with it, and certainly no economies of scale associated with aggregating plan assets so as to get some serious pricing discounts. And for many of you, with the private equity firms that you run, your portfolio companies have well over 100 employees, which is the threshold in most cases for a plan audit. If you've got 20 companies and 10 of them are over the audit cost, that's easily $100,000 in annual audit fees that could be scaled down to probably $15,000 to $20,000 if there was simply one audit globally for the whole plan. So there's very serious economies of scale that you pick up by doing an aggregation. Phil, what are your thoughts on that, too?
Phil Scott:
Yeah, I think the one thing that is always very attractive is the redundancy, and the ability to replicate utilizing the service model which brings in all of the experts in each one of their verticals. And I think when you look at this from a private equity perspective, they may be the ultimate candidate for pooled employer plans that we've seen today. And so, when you look at that redundancy and you become really familiar with the team and the service providers, that expertise that's actually running your plan, it really is a great process when those acquisitions occur, or when a company is sold off. You have a team of experts right there to support you for that private equity firm.
Phil Scott:
So really, I think Terry and Patrick, Steve, the one thing when you have the expertise in each one of those verticals, everybody knows their role and stays very focused on that role. And really, when we look at the contact, the constant contact, once we bring these adopters in place, and the pooled employer plan is in place, Patrick, it becomes a constant contact with all of those service providers and everybody who has touch with that pooled employer plan.
Patrick Hayes:
Yeah. No, that's a great point and you've already touched on a lot of these different items we have with the next slide that really talk about, in the new model, many of those benefits that we've talked about today. All of the fiduciary risk and administrative, those different responsibilities, they're really able to outsource so much of that to the P3. The increased size of the plan gives them greater economies of scale. They're able to scale back on the internal burdens and costs from their CFOs and COOs, and the time and the resources they have to spend to run the plan.
Patrick Hayes:
And, as we've talked about, the nexus requirement is completely gone. And firms even have the ability to pull in stuff. Yeah, I saw you, Terry. Was there something you wanted to add to that?
Terry Power:
Yeah, one good point there, too, and probably to stress. This is not an elimination of all of the fiduciary liability for the employer. It is a dramatic reduction in terms of liability. You no longer have any liability associated with filing 5500s or audits, it's all done globally at the PEP level. You have no responsibility for investment fund selection and monitoring. On any given day, we can pick up the Wall Street Journal and see another company being sued for trying to do the right thing, but their fees are too high or their core base is points above a standard. That's not your worry anymore.
Terry Power:
The responsibilities that remain deal with remitting payroll deferrals in a timely manner. You cannot steal the money, that is something you still can't do. If we need information from you, we have to have you give us that information. And if we have something that needs to be distributed to participants and beneficiaries, we need you to do that. Apart from that, you're going to have, just on an annual basis, or more often if needed, just review the situation as far as the pricing, the suitability, just like you would for any of your other employee benefit programs, to verify that it still makes sense for you. And if it doesn't, you can always go back to doing just what you did before.
Patrick Hayes:
Right, right. That's a great point. Thank you for clarifying that Terry. And maybe to build on that, Phil I'd like to circle back to you and talk about the final step in the process, right? Which is, after the plan has been built, after we've done all the front end work, we've had adopting employers that have come on. What happens after they've then been adopted into the plan? What kind of ongoing services take place?
Phil Scott:
Yeah, that's right Patrick, and to add to Terry's points, shy of not running your own plan, we're trying to insulate the client, at the end of the day, with the best silver bullet that's out there. Being able to outsource the risk and the liability. But again, as Terry pointed out, you're not going to be able to outsource all of that risk, you still have the responsibility of selecting the team that's running your plan.
Phil Scott:
So, who all is running the plan? Who are all of the players? And when we bring a new adopter in place, there has to be some level of constant contact, and probably most Strategic Capital Advisers has touch with all of those players. The plan administration team, the contact at the adopter, the plan administration team from a 3(16) perspective. Also, the branding, the nexus team. One of the greatest advantages here, you can outsource all of the duties and utilize a pooled plan provider, but you can put your own brand on the actual title of the pooled employer plan. So one of the things we don't want to miss in this conversation is the simple capability to brand it as your plan, so private equity firm A retirement savings plan, and at the same time you're outsourcing to the P3 and all the teams that are involved.
Phil Scott:
At Strategic Capital Advisers we have touch, as I mentioned, with the plan administration team, the 3(16), the branding team, the record keeper. We also have a team of advisers, several on the call today. Those advisers are assigned at each of the adopters. One of the things that we don't want to lose sight of in creating a silver bullet for adopters in the pooled employer plan arrangement, we don't want to lose sight of the participants, and I think that was one of the centric focus of SECURE Act and some of that legislation is out there to protect participants. So we don't want to lose sight of that, so each one of the adopters that come into the pooled employer plan will have a licensed investment adviser assigned to their specific participant group. [crosstalk 00:43:52] Sorry.
Patrick Hayes:
You're fine. I wanted to make sure to follow up because I think it's a really important point for a lot of the folks that are listening here. You talked about being able to brand your own PEP and what that means, and being able to bring on new companies into the PEP. If you're a private equity firm, walk me through both the ease of the onboarding of that firm, and then potentially again... I know Terry talked about it earlier, but if they were to sell that firm down the road, what kind of options would be available?
Phil Scott:
Absolutely. Bringing on a new firm, once the acquisition occurs, our firm goes in to work. And we sync up the record keeper and all the resources and tools that we have at the record keeper. We sync up our team, along with Terry's team and certainly the contact team at the private equity firm, as well as the company being acquired. Because when that company is acquired, those acquired employees have a ton of questions. Whether it's a stock purchase or an asset purchase, there are always questions as to what happens to my old plan? What happens to my old assets? How do I handle that? So we deploy a team, very coordinated, very in-sync, across Terry's team, whoever the record keeper that we're utilizing. Also the plan administration team, internally.
Phil Scott:
And so, we really coordinate and point that effort whenever that acquisition occurs, and there are assets to bring under the pooled employer plan, so we've become experts in this thing called a blackout, the blackout phase and the process. So all of that is in conversation, anytime we're in a stock purchase. Asset purchase is a little different. Again, if you're in the private equity space you know the different between the stock and the asset purchase. We don't need to get into the details there, but just know that you have a team coordinated in that effort to bring those new employees under the adoption of that new private equity firm coming underneath the pooled employer plan.
Phil Scott:
So we all work very closely at the adopter level, the contact as well as those participants. We don't want to lose sight of those participants. That's always an uneasy time, as many of you know, and so we want to support them with all the tools, enrollment process, and resources that we have across the board to make that a concierge experience.
Patrick Hayes:
So it sounds like, to me, for those folks that might be engaging in that kind of M&A activity or having the onboarding or sale of those different portfolio companies, really this entire package of benefits, as it relates to the retirement plan, really... You're able to effectively remove from a lot of the headache that you have as part of that process, right? Because that company, even if they're being spun out of the portfolio itself, you're able to still kind of maximize and leverage the relationships you have with the pooled employer plan so that the benefits don't become an issue, and you don't even have to worry about... If you don't want to, you don't even have to worry about transitioning it then.
Phil Scott:
Absolutely. Let's just fast forward a few years. You've acquired a company, they're a new adopter, they're under the pooled employer plan, and now you're selling that company. Certainly we're a resource, always Calfee is a resource on the ERISA side. If you have any questions, you have a team collectively that can answer those questions. But when you're actually transitioning that company out, that company adopter has the option to stay right where they're at underneath of that pooled employer plan. We'll have a Calfee pooled employer plan that they could transition to. They can stay under their current pooled employer plan that may be branded, your private equity pooled employer plan. Or, if the acquiring company has some type of an acquisition where they want to bring that plan over into their 401(k), certainly they'll have that option as well.
Phil Scott:
And then always, we're a team that builds those engaged relationships at the participant level, so if there is ever a moment where those employees are terminated, they certainly are in a rollover opportunity, and so we would always be there as a resource as licensed investment advisers to assist, for those who want to stay and continue to work with our team on a licensed investment adviser perspective. So that gives you just a lot more options under the pooled employer plans that have come underneath the SECURE Act, Patrick.
Patrick Hayes:
Yeah, no that's great. Did I see Terry? Did you have something that you wanted to add there?
Terry Power:
Yeah. An important point, too, because you don't have the nexus requirement, Phil touched on that, there isn't this made race as there usually is to toss them out of the plan and put them into a different program. They could stay, but also if you have your own pooled employer plan, because we have the ability to de-adopt them for any reason, you can also enforce the fact that, if we've sold you, you're gone. So you can go ahead and do that, too. You have a lot of flexibility and we just didn't have that before, prior to the SECURE Act.
Patrick Hayes:
That's great. I notice that we are really running short on time. I know Phil, you've touched on a lot of this ongoing work that you and your team at Strategic Capital Advisers would really be able to provide on an ongoing basis for a lot of those folks, all of the different adopters in that pooled employer plan, right?
Patrick Hayes:
So let's skip ahead and, I know we've got... This was talked about at the top of the call. I think Terry mentioned, these plans are looking to go live on January 1, 2021. What can firms be doing right now as they start looking ahead at this opportunity, and really being able to maximize it to really enhance the services that they're providing their clients? And then, once we've talked about that, maybe we can get to some of the additional Q&A.
Terry Power:
Sure. With 136 days to go, that's how close we are to January 1st, it's a matter of firms taking a look to see if this might make sense for their group. You could be a prospect for a pooled employer plan if you have multiple companies that you own, even a small percentage interest in, where you have especially multiple audits going on, multiple 5500s. You'd be finalizing a plan design, selecting a pooled plan provider. This is something we're going to be doing in an ERISA counsel. Selecting a 3(38) investment manager as well, and that would be someone engaged by the pooled plan provider, as well as a record keeper.
Terry Power:
These are all just conversations that your pooled plan provider and your legal counsel would have to identify what makes the most sense. It may be a situation where you're already with a record keeper that does good work, you don't want to make a transition. And we work with several of the largest record keepers in the industry. You don't necessarily have to make a change of record keepers in order to fold that into a pooled employer plan, and your plan audits and 5500s. Identifying existing clients, who might be prospects. And then establishing marketing programs, we've talked about that also, for advisers because we see a lot of interest in advisers and 3(38) investment managers that want to set up programs that they can bring to their own clients. So there's a couple of different uses for this. We see interest from associations that want to establish plans for their association members.
Patrick Hayes:
Great point. Actually, go ahead and talk about that a little bit, just again, because I think... For some of those folks on the phone, as part of the financial services or again, some of those trade organizations, if you have member constituents how this might be a real benefit.
Terry Power:
Exactly. It's all coming, and we're pretty close.
Patrick Hayes:
Right. With that, maybe we can get to some of the Q&A, and I might ask Terry or Phil, if you all can take a look at some of those questions and we can dive in to those.
Terry Power:
Sure, let me get the first one here from Carlo. Let me get to this. "What are your thoughts on each company's fiduciary responsibility to review investment fees and investment performance when the plan's investments are bundled with 20 other companies?" Again, keep in mind, if the plan has a 3(38) investment manager, it's not a requirement but it certainly is best practices, that 3(38) investment manager assumes all the responsibility for fund selection and monitoring. That's not to say that you, in your own position on a global basis, just want to make sure that things are in line, and just looking at the reports being generated, but you are not a fiduciary to the extent that they are picking funds and monitoring it, if there is a ERISA 3(38) investment manager involved.
Terry Power:
We had a couple questions on different plan designs, plan designs within the PEP. There's another question concerning everybody has to have the same plan design. Certain PEPs may have that. Our programs that we've been running for 20 years do not. We can actually accommodate on a per-adopter basis, per-employer basis, any non-standardized volume submitter document, or prototype document that is out there in terms of whether it's a safe harbor or a matching contribution, cross-tested plans, variable investing schedules. As long as it's legal, we can do it, and they are set up separately on each adopting employer.
Terry Power:
The only thing that's aggregated are the financials and that's for the audit purposes and the 5500, but the testing is all still done a per-employer basis. And as a TPA, this is what we do on a regular basis. Our largest multiple employer plan client has several hundred adopting employers and a lot of money, and it's a lot of work. A lot of it also stems from having a structured program in place where everything is uniform as far as... Certain things are hardwired in, and the programs are being structured properly for ease of administration.
Patrick Hayes:
Great.
Terry Power:
Good one for Steve here, I think. Relating to non-compliant adopting employers. If one company doesn't pay their contribution, Steve, into a plan, employers might be turned off by being included in a 5500 and audit financial statement. What do you do about a non-compliant adopting employer?
Steve Day:
Yeah, well like you mentioned, with the SECURE Act changing the approach to the one bad apple rule, it's now easier to spin off the so-called bad apples. Now, if it had already occurred and now the toothpaste is out of the tube, and you've got to report something on the 5500, or in the audit, I don't know to the extent they might be updating the 5500 to be more accommodating here, to where if it really was just one employer that had a delinquent contribution, if you can somehow note that in the 5500 or in the audited financial. But I don't think it's going to have a lasting effect on the plan overall because of your ability to spin out these delinquent, or bad actors, from the plan.
Steve Day:
And Terry, like you mentioned, not only do you have the legal right to do it, but it sounds you're going to have the contractual right under your service arrangement that you can spin somebody out of the plan, assuming in good faith, if they are causing problems or having operational failures. There might be some notice requirements under the law once the regs come out. There's probably going to be a notice or two that you have to give the so-called bad actor, but if they don't right the ship then obviously they can be spun out.
Patrick Hayes:
One other question I was just going to bring up, and this might be one for you, Phil. When you have an adopting employer that's coming on, and I know maybe this... Terry, feel free to chime in here, too, but you all have worked with those record keepers before, right? And you've been in that seat, and you understand that as you're building these pooled employer plans, one of the most important things, really, is to talk to them about, as you continue to add to the plan, how those economies of scale are really going to benefit the pooled employer plan, right? And that a lot of that, you're able to really get done on the front end part of that, so that, again, as it just gets build, and build, and build, all of the member companies just really continue to reap the benefits.
Phil Scott:
Absolutely Patrick. Let me jump in on that, Terry. The one thing that you have access to inside of the team that we've built, call it the ecosystem, [inaudible 00:57:06] as the collective team of experts here on the call today. One of the things that's very important when you're negotiating with record keepers is to know where we're at today, and let's say we're working with a private equity firm and we know without a shadow of a doubt we're going to bring in, say $100 million, we begin the negotiating at $100 million. We set milestones up front, once the assets accomplish a certain level of assets. From that point, we build in negotiated pricing from that point. So there's tremendous advantage to continue to add adopters on the pooled employer plan itself. That negotiation is ongoing as the assets build. Again, on this call today, off our team we have more than 100 years of expertise in running these plans. So this is something we've been doing, Patrick, for about 15 years and working with those record keepers.
Terry Power:
Yep.
Patrick Hayes:
Thank you so much.
Terry Power:
Great point. A question came up on terms of the benefits are numerous. What's the downside? There are a couple downsides, and a lot of it depends on, it might be plan design. It may be something on the investment side. It might just be a company that wants, they really enjoy being involved with investment fund selection and monitoring. Those committee meetings were a lot of fun up until about March of this year. Everybody's making money, it's very simple to do that until the market goes south. If a plan, for instance, has self-correcting brokerage account, that's not going to be offered, typically, in a pooled employer plan so if you have a 401(k) where employees can go out and buy individual stocks and bonds, that might not be a good candidate for 401(k) inside of a PEP environment.
Terry Power:
There was an article I was in back in February, in Pension & Investment Magazine, talked about the low-hanging fruit in terms of who is the best prospect for these kinds of programs, and that's going to be primarily companies with at least 120 employees because they're having to have an audit every year, up to maybe 5,000, this is per adopting employer, with assets anywhere from $3 million to probably $50 million per adopting employer. They're the ones that can benefit the most from scale, and from the significant savings on the audit, as well as the time associated with streamlining everything by having outsourced the fiduciary management of the program.
Patrick Hayes:
Sure. I want to follow up though on that, Terry. Because you mentioned those candidates, and certainly you talked about trade associations being a big player. We've talked about private equity firms and their underlying portfolio companies. Even if a company has under 100 employees, though, they can still probably see significant benefits as well. Is that right?
Terry Power:
Oh, certainly. Yeah exactly, especially if there's... By aggregating your assets with those of other companies, you have a lot more buying power. As I mentioned, 20 plans with $5 million is much more attractive to a record keeper than one plan with $5 million. Absolutely, the pricing and savings are significant.
Patrick Hayes:
That's great. I know we are coming up on time here at the 4:00 hour. Maybe one more question for us to identify?
Steve Day:
Yeah, I think the last question would be a good one for Phil to address. Phil, are you seeing it? About the plan design issue if there's only one plan document.
Phil Scott:
Absolutely. We talked a little bit about that. I think the big picture, remember the pooled employer plan runs under one plan document. That plan document, from a spectrum perspective, is very wide. So it can accommodate a lot of different adopter designs. So each adopter coming on underneath of that plan document has the ability to build their own design. They have flexibility around matching, safe harbor matching, safe harbor non-elective, profit sharing. So each adopter has the flexibility to build their own design based on what their plan benefit objectives and specs are, so we love the flexibility of the adoption agreement. Any time we need to go outside of the adoption agreement, we can certainly work with Calfee to build an addendum inside of that adoption agreement. But that plan document that the plan is answering to is very wide in its spectrum, to be able to accommodate those different design specs of each one of those adopters.
Steve Day:
Yeah, I think that's a really important point.
Patrick Hayes:
That's great. Well gentlemen, this has been incredibly informative, and I'm sure very beneficial for our audience today. I can't thank you enough for sharing all of your insight. Really, really appreciate that. And I know that everybody on the call does, too. So again, thank you all. For those that are in our audience, thank you very much for joining us today. Of course, feel free to reach out to Steve Day or myself, or to Terry Power, or to Phil Scott with any follow up and we will make sure to provide the slide deck afterwards as well. Thank you again, and enjoy the rest of your Tuesday.
Steve Day:
All right, thanks everybody.