An International Perspective on the Impact of Pooled Plans on Retirement Markets

With the passage of the SECURE Act, there is the potential for increased adoption of pooled plans in 2021.

By Neil Lloyd, Head of US Defined Contribution and Financial Wellness Research, Mercer

Mercer’s June 24, 2020 “Retirement reinvented” webinar focused on three disruptors changing the defined contribution (DC) landscape in the US: the COVID-19 turmoil’s impact on employers; the increasingly litigious environment for plan sponsors; and the 2021 introduction of Pooled Employer Plans (PEPs) authorized under the SECURE Act. One could probably add regulatory developments to the list, with the Department of Labor (DOL) releasing a flurry of proposals in the second and third quarters of 2020. All of these we believe will lead to continued increased demand for outsourcing options, especially in outsourced investment solutions, or OCIO. But we also see the potential for increased adoption of pooled plans including PEPs.

Audience Snapshot

Given all the challenges mentioned earlier, headlined by the COVID-19 pandemic, we conducted a spot poll of attendees and received the following feedback regarding their time management and business priorities:

While this was not a total surprise, 48% indicating they spent “less than I’d like” and “far too little” was material, particularly remembering that this was a group that was engaged enough to attend the webinar. It would have been interesting to poll those who did not attend the webinar.

The sample for this poll was fairly small, with an audience of just over 200 attendees. So we repeated the question at our DC Quarterly webinar on August 13 with a similar audience. Again, we expected this to be a more engaged group, but in this case the 48% moved to 50%. This is in no way a criticism of the attendees, but I think, a realistic assessment of the strains on people and companies that have occurred in 2020. No one knows when the challenges we have been facing will be resolved, and it shows in the polling data.

The International Perspective

Liana Magner, Mercer’s US Defined Contribution and Financial Wellness leader, led an international panel to probe how pooled plans have had an impact on retirement systems in their regions as a way to help the audience assess how pooled plans may be received in the US. The Q&A covered many topics, including the following:

• Impact of pooled plans on the retirement market;
• Which types of employers have gravitated to pooled plans;
• Impact of pooling on costs and participant outcomes; and
• Product innovation

Joining Liana were Philip Parkinson, Mercer’s UK Defined Contribution and Master Trust Leader, and Janina Slawski, Head of Investments Consulting at Alexander Forbes in South Africa.

Here are some of my takeaways from that discussion:

• Phil estimated that in the UK, over half of single employer, trust-based plans in the UK had closed over the last 10 years, and that the vast majority (probably around 90%) of new contributions were going into various pooled arrangements.
• Janina mentioned that the South Africa regulators were encouraging pooled arrangements as a way to reduce costs and help improve outcomes for participants. Furthermore, Phil mentioned that pooled plans were not just appealing to small plan sponsors. Many larger single-employer plans are also finding the economies of scale, reduced hassle, reduced fiduciary risk, improved cost, innovation, and interestingly, participant experience of a pooled plan can give them something better, delivering an outcome more efficiently than doing it themselves.

Following the international discussion, we asked the audience which benefits of pooled plans they viewed as essential. Asked to indicate all that applied, the overall ranking of responses was interesting, with fees being the top scorer (something both Phil and Janina had mentioned in their remarks).

• 69.3% lower participant fees
• 66.5% mitigation of fiduciary risk
• 65.9% reduced administrative workload
• 57.0% a well-diversified investment lineup
• 45.8% a great participant experience

Conclusion

Within the industry there is some cynicism about the impact pooled plans will have, but to test this theory, we asked the audience to indicate which statements resonated with them. (They could indicate more than one.) The aggregate responses, arranged from lowest to highest, are listed below.

• 15% I want to maintain my own sponsored plan but consider outsourcing more of my administrative fiduciary roles
• 18% I’d like to explore pooled plans further
• 23% I want to maintain my own sponsored plan but consider outsourcing more of my investment fiduciary roles
• 26% I want to maintain my own sponsored plan and retain all related responsibilities
• 43% I’m interested in exploring some of these options, but not in the current market situation

The results indicate a definite interest in pooled type arrangements, although it was noted that in the current market situation this may not be the top priority.

We believe that pooled plans may have a meaningful impact on the US market, and it was encouraging to hear how the increase in innovation and participant focus in the UK and South Africa helped improve participant outcomes — and how such arrangements are potentially saving employers time and helping to reduce their fiduciary responsibility.

Based on polling data and questions asked following the online presentation, the observations shared by our colleagues overseas clearly engaged the audience. As indicated above, only 18% of the audience was not interested in pooled plans or further outsourcing opportunities. While the US market and regulatory environment is different from the UK and South Africa, based on the experience of our international colleagues, we expect and hope to see pooled plans offered in the US retirement market to help:

• Reduce administrative workloads
• Reduce fiduciary risk
• Lower participant fees
• Increase professional oversight of quality, market-leading investment options
• Increase innovation
• Increase better participant experience
• Ultimately increase better participant outcomes

Who wouldn’t want that?

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Important Notices

Mercer does not provide tax or legal advice. You should contact your tax advisor, accountant and/or attorney before making any decisions with tax or legal implications. This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. Click here for the Important Notices.