Background: PEP Market Opportunity
One of the largest unsolved problems for workers in the United States today is providing adequate funding for retirement. A low- to middle-income American earning less than $20 an hour with no access to workplace-based savings options is likely to fall short of their retirement savings by $200-300K. This may impact their monthly retirement income by $1,500 to $2,000, making a huge difference in their quality of life. There are nearly 40-50 million such Americans working for ~30 million small businesses with less than 100 employees who have no access to workplace-based savings options i,ii,iii.
Understanding the plight of these workers, the government passed the SECURE Act in 2019, which makes it easier for smaller employers to offer these benefits to their employees by removing several fiduciary and regulatory restrictions, thereby extending the concept of multi-employer plans to pooled employer plans. This creates a huge opportunity for retirement plan providers, with many of them putting their weight behind tapping into this new segment as an engine for growth. While excitement at the C-suite level for building a strategy along these lines is highly expected, these initiatives will only be successful and grow profitably with the right execution plan and operating model.
History demonstrates that for every successful market entry, about four failiv. For example, while Google launched Google+ in June 2011, it was eventually shut down. The design product was disconnected from the nuances of customer expectations in a burgeoning market. On the other hand, ING leveraged its strong digital infrastructure backbone to build an easy-to-use interface and data-driven, real-time decision engine for new loan applications. The company successfully scaled its business catering to SME customers in Europe. Companies that cannot tailor their products to deliver the right customer experiences often see to low talent retention, low productivity, and unrealized customer value. This is one of the key reasons why the retirement industry has had little success in penetrating the micro-markets, and is likely to face similar challenges when entering the pooled employer plan market.
Seeing as the SECURE Act went into effect on January 1st, 2021, the time is ripe for providers to start building execution plans that can maximize the likelihood of success when offering pooled employer plans.
The SECURE Act was signed into law on Dec. 20, 2019, as part of the Further Consolidated Appropriations Act of 2020. The SECURE Act opened up a new multi-employer plans (MEPs) micro-market in the form of pooled employer plans (PEPs), with reduced regulation, reduced administration, and lower regulatory and compliance costs and risks.
The law relaxes many of the constraints previously associated with MEPs. For example, employers no longer have to be in the same industry or region to join an MEP or PEP. The “bad apple” rule has also been eliminated, which can incentivize an employer to act as the fiduciary on behalf of a pooled employer plan.
The SECURE Act also corrects a number of rules related to tax-advantaged retirement accounts. Here is a list of what it can do for employeesv:
- Simplify the processes for small businesses to set up 401(k)s by increasing the cap under which they can automatically enroll workers in “safe harbor” retirement plans, from 10% to 15% of wages
- Enable businesses to sign up part-time employees who work either 1,000 hours throughout the year or have three consecutive years with 500 hours of service
- Encourage plan sponsors to include annuities as an option in workplace plans by reducing their liability if the insurer cannot meet its financial obligations
What Do Retirement Providers Need to Do?
The opportunity for offering these new plans is massive. Providers strategically planning to launch these products in this market must focus on several key areas:
- Conducting market feasibility litmus tests and financial feasibility analysis
- Shaping product strategy, placement, and design
- Developing a sales and distribution strategy
- Creating a technology- and data-driven digital operations and servicing model
As market players delve into the ideation phase of how to service this new market, their focus is likely to center on the first three aspects. However, they are likely to come up short when it comes to understanding and building a digital operating model that includes three key prerequisites before executing on the strategy:
1. Differentiated customer journeys with digital-led experiences
2. Target operating model design
3. Modernizing technology architecture
1. Differentiated Customer Journeys with Digital-Led Experiences
In the PEP market, redesigned operating models must accommodate user journeys for employers, employees, participants, and financial advisors. Each of these groups will require considerations for their individual needs when designing user journeys.
PLAN SPONSOR COMPLEXITIES
As small businesses face the uphill task of identifying other employers looking to address the financial wellness needs of their employees, they may be grappling with limited resources and the complex roles and responsibilities at play within the PEP structure. Plan sponsors would do well to consider several questions:
1. Are you designing digital onboarding, enrollment, and servicing options before entering the PEP market?
2. Are your advisors equipped with enhanced customer engagement platforms and easy-to-use applications on their device of choice?
3. Do you have the required data architecture to enable automating features of the PEP product or service, such as auto enrollments or automatic portfolio rebalancing?
4. Do you have a sound prioritization framework in place to effectively prioritize investments in competing digital use cases?
5. Are you designing predictive capabilities to provide alerts on plan sponsors who are starting to look at other providers?
As overall financial wellness becomes a key enabler of participant confidence, it is likely participants will look forward to an integrated omni-channel experience and a step change in the investment educational needs met by the PEP.
Questions to be thought about here include:
1. Do participants have a seamless experience regardless of their preferred channel of communication and servicing?
2. Do participants have information on what investment options or fund portfolios will give the best outcomes for their individual attributes, such as risk/reward appetites, demographics, career aspirations, behavioral, and experiential traits?
3. Can future customer service requests be proactively met based on their historical request patterns or account activity?
4. Are predictive models being designed to proactively detect and predict fraud based on transaction activity for specific participant accounts?
5. Are there intelligent advice engines available or in design that can provide participants with proactive retirement advice and a holistic view of retirement readiness?
As financial advisors are tasked with engaging and identifying best-fit providers amidst the complex fiduciary and operational logistics of the PEP market, there will be an increasing need to simplify their experience and improve efficiency.
As such, providers must answer questions centered on understanding and prioritizing the key touchpoints that add the highest manual burden across the advisor journeys.
1. What digital tools do you equip your advisors with that help reduce the sales cycle time through preunderwritten, self-service product or plan design options?
2. Do you have advanced configure price quote (CPQ) solutions in place to accelerate and standardize the quote-to-price processes?
3. Do you have data-driven advisor segmentation models in place that help streamline lead generation and prioritization?
4. Are you providing your advisors with the needed education on new products and plan designs?
2. Target Operating Model Redesign
In entering the PEP market, target operating models must include:
- Digital interventions across the front, middle and back office that reimagine processes and promote low-touch, straight-through customer acquisition and servicing
- A data-driven approach to drive sales effectiveness, pre-empt customer and plan sponsor needs, and democratize business intelligence through real-time and self-serve reporting frameworks
- Retooling and reskilling of the workforce in line with these digital interventions, as well as an empowered work-from-anywhere approach
3. Modernize Technology Architecture
This will be core to success in the PEP market. Providers must assess the readiness of their technology environment and data architecture, addressing any gaps in digital experiences.
Key tenets to take into account for the technology architecture should include building end-to-end, digitallyenabled, customer-centric technology models. This includes:
- Cloud-based record keeping technology platforms for improved agility, scalability, and availability
- Technology wrappers to enable point solutions across customer the lifecycle, such as:
- 360-degree no-touch payroll integration
- A holistic view of plan health, including audit readiness and compliance needs
- Automated contributions and loan withdrawals
- Digital enrollments utilizing prebuilt integration and reusable APIs
- System Integration to ensure entire architecture is seamlessly integrated
Adopting and implementing these key tenets may be a daunting task, with many solutions and technology providers involved.
Conclusion: Success in the PEP Frontier
While multi-employer plans are not new to the industry, the SECURE Act has led to a lot of excitement within the industry in anticipation of it propelling the adoption of defined contribution plans and fueling growth in the micro-market segment.
With strategic decisions on entering this new market segment and building a product for it out of the way, the key questions that providers will need to ask themselves include:
- What kind of experience are the financial advisors, plan sponsors, and participants expecting from their providers?
- Can our current processes be re-engineered to design a next-generation target operating model that is more efficient and fosters innovation?
- What integration should be built within the record keeping system that enables straight-through processing, digital omni-channel experiences, and real time data-driven decisions that help improve customer satisfaction and self-service?
The fastest and the least capital intensive way to achieve these outcomes is to partner with a service provider that has established credentials in domain expertise, digital transformation, process excellence and advanced analytics. This will not only equip retirement providers to achieve a quick return on investment, but also help transform the existing book of business to significantly lower costs and increase plan retention.
AVP, Life & Annuities, EXL
AVP, Digital Consulting, EXL