House Votes to Halt Rules on Government-Run IRAs for Small Businesses

Some business groups are wary of government retirement plans for private-sector workers

Stephen Miller, CEBS By Stephen Miller, CEBS February 17, 2017
House Votes to Halt Rules on Government-Run IRAs for Small Businesses

Update: Senate Halts Rule on State-Run IRAs for Small Businesses.

Obama-era Department of Labor (DOL) rules that allow state and local governments to require employers without workplace retirement plans to automatically enroll employees in state- or local-government-run individual retirement account (IRA) programs are under fire.

On Feb. 15, the House passed two resolutions to block the DOL's rules for government-run IRA programs, invoking the Congressional Review Act (CRA), which allows Congress to pass a resolution to overturn any rule finalized by a federal agency within the last 60 legislative days. Within that window, a rule can be rolled back by a majority vote in the House and Senate—which cannot be filibustered—followed by the president's signature.

The first resolution (H.J. Res. 66) passed by the House would block a final rule issued in August 2016 that provides a safe-harbor exemption from the Employee Retirement Income Security Act (ERISA) to state auto-IRA plans, while the second resolution (H.J. Res. 67) would block a rule finalized in December 2016 that similarly provides an ERISA safe harbor for auto-IRA plans run by political subdivisions such as cities or counties. Both resolutions were introduced in Congress earlier this month.

Senate Nullifies Rule on City-Run IRAs

On March 30, 2017, the Senate voted to block the Obama Labor Department rule that made it easier for counties and cities to create their own programs that would require small businesses lacking retirement plans to auto enroll workers into a municipal-run plan. The chamber voted 50 to 49 in favor of the resolution of disapproval, H.J. Res 67, and the measure was sent to President Donald Trump for his signature. The Senate was expected to subsequently vote on the DOL rule that allows state-governments to create mandatory auto-enroll IRAs for small businesses. (See the SHRM Online article Trump Signs Resolution Nixing City-Run Auto-IRAs for Small Businesses.)

"Unfortunately, in the final months of the Obama administration, the Department of Labor created what I consider to be a regulatory loophole that would ultimately force workers into a government-run IRA system," said Rep. Pete Sessions, R-Texas, chairman of the House Rules Committee, which held a hearing on Feb. 13 to consider the resolutions. "As a result, some employers will be forced to automatically enroll workers into a government-run IRA through payroll deductions. And unlike private-sector retirement plans, workers enrolled in these public-sector plans would not be afforded the important protections that were provided under ERISA."

"For decades, Congress has promised a bipartisan basis to protect the retirement security of workers and their families, and with these resolutions, we are making good on that promise," said Rep. Virginia Foxx, R-N.C., chairwoman of the House Education and the Workforce Committee.

Others, however, defended the rules and the government-run plans they are intended to facilitate. "Savers that are targeted to participate under government-run IRAs currently have no formal workplace retirement savings program—with or without ERISA oversight—and in all probability have little, if anything, saved for retirement," said Barb Van Zomeren, vice president for ERISA at Ascensus, an independent retirement plan and college savings services provider based in Dresher, Pa. "For such employees, an IRA-based auto-enrollment retirement plan is an important first step toward a secure retirement."

IRAs are not generally subject to the rules specific to ERISA-governed, multiparticipant retirement plans, due to their nature as individually funded and controlled savings arrangements that do not permit employer contributions, Van Zomeren noted. The reason why states wouldn't be required to act in the "best interests" of participants under the fiduciary standard or make specified disclosures is because "ERISA imposes administrative and compliance responsibilities that are generally related to protecting contributions that are made on behalf of participants by their employers. IRAs do not permit employer contributions." However, she pointed out, "the general fiduciary protections that exist for all IRA savers still apply."

Critics point out, in turn, that DOL rules don't require government-run retirement accounts to be portable or that workers be allowed to withdraw their savings at any time, and that many states opposed such requirements so as to achieve the scale necessary to minimize administrative costs that are capped by state law. Also, some fear that investments chosen by government officials could be politically influenced.

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

State IRAs May Impact Employer-Sponsored Plans

A growing number of states and a few localities have been moving ahead with plans to launch retirement programs for private-sector workers, in accordance with the DOL rules. The California Secure Choice retirement program, for instance, will require private-sector employers with at least five employees, if they don't already offer a retirement plan, to enroll their employees in the program and to make automatic payroll deductions on behalf of employees who don't opt out.

Some business groups have been wary of these programs, seeing unfair competition with private-sector plans. A letter sent on Feb. 7 to House Speaker Paul Ryan, R.-Wis., by the ERISA Industry Committee (ERIC), a Washington, D.C.-based group that represents large employers, expressed concerns that recent proposals at the state and local level would "unnecessarily disrupt active employer-sponsored retirement plans that are already in full compliance with federal laws and regulations" because these proposals "would force plan sponsors of tax-qualified retirement plans to alter aspects of their retirement plans to be exempt from the state or local mandate."

Will Hansen, the letter's author and senior vice president for retirement policy at ERIC, wrote that Oregon's Retirement Savings Plan, scheduled to be implemented later this year, only exempts employers from being required to participate in the state program if the employer provides a 401(k) or similar plan that enrolls all employees within 90 days of hire. "For employers, it is important that they be able to design plans that work effectively and efficiently based on the needs of their workforces and the industries in which they operate," Hansen noted. "Rules that are too onerous or restrictive can chill an employer's commitment to offer a retirement plan."

But Van Zomeren pointed out that Oregon recently announced on its OregonSaves website that "Businesses that offer a qualified retirement savings option to employees, but with a waiting period, will not be required to facilitate participation to OregonSaves for eligible employees."

"States that have passed legislation enabling auto-IRAs did so in order to minimize administrative and financial burdens on their private-sector employers, hoping to limit employers' roles to payroll withholding and require no contributions on their part," she said.

Still, the threat that state plans might encroach on private-sector plans remains. "We believe that the Labor Department rules were overly broad," said Annette Guarisco Fildes, ERIC's president and CEO. "The rules inappropriately allowed states and localities to impose requirements on employers already offering retirement plans. Mandatory state or local retirement plans should focus solely on employers who do not provide a retirement plan and explicitly not apply to employers who provide a plan subject to federal rules. Imposing restrictions on large employers offering retirement plans will only chill their commitment to offering a quality retirement plan."

The Society for Human Resource Management joined with the U.S. Chamber of Commerce, the American Benefits Council, and other employer and business groups in sending a Feb. 13 letter to members of Congress in support of both resolutions against the DOL rules. "If a state mandates auto-IRAs, some employers will decide to avoid taking on the work of offering their own plans and let the state take it on instead, resulting in the loss of significant retirement savings opportunities for their workers," the letter stated, among other points. "We urge Congress to take timely action under the CRA to vitiate these misguided regulations."

However, "The option to establish a more-formal ERISA plan would always remain for employers" that participate in government-run IRA programs," said Van Zomeren.

What's Ahead?

If the two resolutions rolling back the DOL rules are passed by the Senate and signed by President Donald Trump, some believe this will effectively prevent states and local governments from offering auto-IRA plans for private-sector workers. Others suggests it's unclear whether the development of government-run IRA plans will cease altogether or whether some projects might proceed despite the lack of a safe harbor from the DOL for the programs and participating employers.

"We will regroup," Joe Torsella, Pennsylvania's state treasurer, told the publication Pensions & Investments following the vote. "While there are [fewer] options open to us, it's not that there are no options," he said. "I don't think any of us are going to give up on finding ways to help Americans save for their retirement, unless Congress has better ideas."

Joshua Gotbaum, chairman of Maryland's small-business retirement savings program, told Pension & Investments that the DOL's safe harbor is a conservative interpretation of what ERISA permits, intended to reassure states. Removing the safe harbors “can't and won't change the law," he said. "States and cities can and should do what they are already doing."

Are MEPs an Alternative for Small Businesses?

A 2017 report by the U.S. Chamber of Commerce in Washington, D.C., notes that under state auto-IRA programs, the amount employees can personally contribute is about one-third of what is allowed in a 401(k), and employers are prohibited from contributing at all, making these programs less desirable for workers than private-sector plans.

To help spur adoption of employer plans, the chamber supports enacting proposed legislation to make multiple employer plans (MEPs) more accessible to small employers so they can join a pooled plan if they are unable to offer their own.

"Open MEPs would allow small employers to offer a 401(k) plan without having to set it up themselves," said Bob Collie, chief research strategist at Russell Investments in Seattle. "Here's an unusual thing in today's world—the concept seems to have bipartisan appeal. So whatever your take on [the Feb. 15 vote] in the House of Representatives, it seems to me that it may simply prove to be one more step toward open MEPs."

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