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The U.S. Department of Labor (DOL) recently issued a Request for Information (RFI) on Pooled Employer Plans (PEPs), exploring whether to create a regulatory safe harbor that would encourage small businesses to join these arrangements. At Employee Fiduciary, we submitted a formal comment in opposition.
Our message was simple: a well-designed single-employer 401(k) plan can deliver lower costs, more flexibility, and better transparency than a pooled arrangement. Instead of a PEP safe harbor, we urge the DOL to create a safe harbor for low-cost single-employer plans with clear, auditable standards.
Our Case Against Pooled Employer Plans (PEPs)
PEPs are marketed on two headline promises—lower fees and less employer liability. In practice, those claims distract from the real goal: control. Providers can abuse this control by standardizing terms, steering investment menus, and embedding revenue streams that make PEPs more profitable.
Economies of Scale Are Not Supported by Market Data
PEP marketing leans on “economies of scale,” but the current market is concentrated. EBSA’s inaugural PEP bulletin shows 190 PEPs with about 618,000 participants in statistical year 2022 and 142 registered Pooled Plan Providers (PPPs) at the end of 2023; the top 20 percent of PEPs held 87 percent of assets. Concentration and uneven bargaining power do not promise broad price relief for small plans.
A Single-Employer Plan Can Deliver Lower Costs Without Pooling
Index funds give even small plans access to very low expense ratios without pooling, and leading families do not pay revenue sharing. Real fee comparisons show the advantage of a single-employer plan with an all index menu, no hidden fees, and flat pricing. In a fee comparison of a 4-participant plan with $670,268 in assets, the PEP’s “all in” cost (administration fees + investment expenses) was $5,641.27 per year; while a comparable single-employer plan cost just $2,834.15. As assets grow, the gap will widen because almost all of the fees charged by the PEP are based on a percentage of assets.
Pooled Arrangements Invite Opaque, Layered Fees That Rise Automatically With Assets
GAO has documented how revenue sharing and variable annuity “wrap” charges can obscure total costs and add fees on top of fund expense ratios That opacity can easily mask higher costs than flat, explicit admin fees. This dynamic is common in pooled arrangements where the PPP and affiliates control menu design and fee flows.
Importantly, the GAO’s 2024 review of fee-disclosure found that transparency—not pooling—has been the key driver of lower 401(k) fees over the last decade. EBSA should continue to lean into transparency rather than endorse a structure that often embeds nontransparent fees.
PEPs Restrict Employer Plan Design Flexibility
PEPs often impose standardized plan provisions across all adopting employers to streamline administration. This typically limits choices on eligibility rules, match formulas, vesting schedules, loans, and distribution features. While these restrictions reduce provider costs, they deprive small businesses of the ability to tailor their plans to workforce needs and business objectives.
A single-employer plan allows employers to implement features such as match designs that can improve employee participation or profit sharing designs that reward performance. By contrast, the “one-size-fits-all” approach of a PEP prioritizes administrative efficiency over meaningful plan customization.
PEPs Are a Vehicle for Proprietary and Conflicted Investment Products
By concentrating investment-menu authority in the PPP and its affiliates, PEPs create a structural opportunity for providers—particularly large insurance companies and financial conglomerates—to insert proprietary funds, annuities, or other high-fee products.
Employers who sponsor their own single-employer plans often reject these conflicted products in favor of simple investments. But in a PEP, employers cede menu control, making it far easier for providers to distribute proprietary offerings. These products frequently carry higher costs and embedded revenue streams that benefit the provider at participants’ expense.
This dynamic undercuts EBSA’s stated goal of promoting lower-cost, high-quality retirement savings for workers.
Outsourcing Does Not Erase Employer Fiduciary Duty—and PPP Control Increases Monitoring Difficulty
The Federal Register notice itself confirms that each participating employer retains the fiduciary duty to select and monitor the PPP and other named fiduciaries. Concentrating administration-related fiduciary roles in the PPP increases conflicts (e.g., appointing affiliates, steering to fee-rich features) and makes monitoring harder, not easier.
PEPs Are Harder to Exit Cleanly
By design, a participating employer cannot simply terminate its piece of a PEP to create a distributable event. In practice, employers typically must spin off to a new single-employer plan and then terminate that plan to unlock distributions—time-consuming and costly steps that trap participants longer than necessary.
Our Recommendation: Create a Cost-Efficient Single-Employer Plan Safe Harbor Instead
If EBSA’s goal is to help small employers sponsor high-quality, cost-efficient plans with clear fiduciary guardrails, the most direct, competition-enhancing path is a safe harbor for single-employer plans meeting objective, auditable criteria. Suggested elements:
Investments
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- Option A: Offer a core menu of broad market index funds that includes a target date index series (perhaps modeled after the Federal Thrift Savings Plan) Keep the expense ratios ≤ 0.15%. Use unencumbered share classes only. No revenue sharing or variable annuity wrap fees.
- Option B: Engage an independent ERISA 3(38) Investment Manage to design and maintain a custom menu and asset allocation approach (e.g., target date series, model portfolios) under a written Investment Policy Statement (IPS). Benchmark annually against comparable index funds and target date index funds, net of all fees.
Administration Fees
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- Flat, per-participant fees for recordkeeping/TPA services (no asset-based admin fees).
- To further reduce the drag of fees on participant returns, employers may pay fees from corporate accounts instead of plan assets.
Conflicts of Interest
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- Open-architecture investment access; any proprietary/affiliate options must be benchmarked, net of fees.
- Prohibit cross-subsidiary revenue sharing or “pay-to-play” arrangements.
Fiduciary Process
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- Simple monitoring checklist aligned with EBSA guidance.
- Plain-English participant fee table (admin dollars + investment basis points, with dollar examples) to demonstrate how much participants are paying.
This safe harbor would let small employers meet ERISA duties with less complexity, lower costs, and clean exit rights, aligning with EBSA’s stated objectives—without nudging the market into pooled structures where conflicts and opacity are harder to police.
If EBSA Does Pursue a PEP Safe Harbor, Strong Consumer Protections are Needed
To mitigate structural risks, any PEP safe harbor should require:
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- All-in fee disclosure (administration fees + investment expenses + revenue sharing + wrap charges), in dollars and % of assets, at plan and employer levels; require PEPs to file a standardized public attachment to Form 5500 showing these amounts to facilitate fee benchmarking
- Ban revenue sharing and ban asset-based admin fees in safe-harbor PEPs; mandate flat, per-participant admin pricing.
- Affiliate use test: affiliated service providers or proprietary products permitted only if documented net-of-fees performance and pricing are equal or better than unaffiliated alternatives.
- Exit rights: require PPPs to offer a no-penalty spin-off process with a defined timeline; provide model communications and a uniform process small employers can execute without additional advisory retainers.
- Monitoring tools: publish EBSA’s “fiduciary tips” as a one-page checklist aligned to actual PEP data filings so employers can monitor the PPP as ERISA requires.
Conclusion
PEPs concentrate power in the PPP, create monitoring and exit frictions for small employers, and often embed layered, asset-based, and opaque fees that undermine the very cost reductions the Department seeks. The simplest, most durable path to lower participant costs and manageable fiduciary oversight is a cost-efficient single-employer plan safe harbor built on unencumbered index menus, flat admin pricing, and conflict-free transparency. I urge EBSA to pursue that course.
