Senate Halts Rule on State-Run IRAs for Small Businesses

States may go forward with retirement programs without an ERISA safe harbor

By Stephen Miller, CEBS May 4, 2017
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updated on May 18, 2017

State-run individual retirement account (IRA) programs for private-sector workers received a blow on May 3, but perhaps not a fatal one.

By a vote of 50 to 49, the U.S. Senate approved a Congressional Review Act (CRA) resolution, H.J. Res 66, to block an Obama-administration Department of Labor rule, finalized in August. The rule would have eased the way for states to require small businesses without their own retirement plans to automatically enroll workers into a state-run program. Individual employees, but not employers, would have had the right to opt out of participating.

On May 18, President Donald Trump signed the measure, just as on April 13 he signed a companion CRA resolution, H.J. Res 67, which blocked an Obama-administration rule to help cities and other "political subdivisions" create auto-IRAs.

The CRA allows Congress to pass resolutions 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. After a CRA resolution is enacted, future administrations are prevented from introducing "substantially similar" rules.

The House had passed both H.J. Res 66 and H.J. Res 67 on party-line votes in February.

A growing number of states—among them California, Connecticut, Illinois, Maryland and Oregon—had passed laws to set up automatic-enrollment IRA plans for private-sector workers in accordance with the DOL's guidance. One of the central components of each program was a mandate for employers of a certain size to offer a workplace retirement plan, either a private-sector option such as a 401(k) or participation in the state's auto-enrollment IRA, when launched.

The California Secure Choice retirement program, for instance, would require private-sector employers with at least five employees, and that 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.

No municipalities had launched their own IRAs for nongovernment workers, although New York City, Philadelphia and Seattle all have considered doing so under the Labor Department rule, the New York Times reported.

ERISA Concerns

The blocked rules allowed states and their subdivisions to design and operate retirement savings programs with a safe harbor from liability under the Employee Retirement Income Security Act (ERISA), which some interpreted as preempting states from offering private-sector retirement plans, and exempting them from ERISA reporting and disclosure requirements that employers, as retirement plan fiduciaries, must abide by.

That raised concerns among business groups. "Workers who are automatically enrolled in any state- or city-run retirement program need the same bedrock investor protections that workers in private-sector plans have enjoyed for more than 40 years," said a statement from the Investment Companies Institute, a trade group for financial services firms. "The [DOL's] rules would limit these workers' ability to address a host of issues, including unreasonable fees and malfeasance.... Congress is right to eliminate these special carve-outs."

The Society for Human Resource Management (SHRM) supported the resolutions to block both rules "due to concerns regarding the negative impact that government-run retirement plans could have on employers," said Kathleen Coulombe, SHRM senior advisor, government relations.

Those concerns, she said, included the following:

  • Mandate on private employers. State plans could mandate employer participation even though retirement savings plans are traditionally voluntary. In some cases, this would require employers that have a retirement plan already in place to comply with unnecessary record-keeping requirements.

  • Patchwork of state laws. Employers operating in multiple states, or with workers from multiple states, would have to comply with a complex web of varying rules, depending on the states in which they operatethe kind of multistate regulatory burden that ERISA was intended to forestall.

  • Challenges managing public pension plans. Numerous states have faced challenges when administering state pension plans for state employees, at times becoming insolvent, calling into question their ability to administer retirement accounts for private-sector workers—particularly if they are exempt from ERISA's fiduciary obligations.

Others defended the idea of individual states providing retirement plans for nongovernment workers. "An IRA-based auto-enrollment retirement plan is an important first step toward a secure retirement," said Barb Van Zomeren, vice president for ERISA at Ascensus, an independent retirement plan and college savings services provider based in Dresher, Pa.

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

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

States Chart Path Ahead

"The chilling effect may be on those governments that are just beginning to consider how to best facilitate retirement savings," said Cathie Eitelberg, public sector consulting director at The Segal Group in New York City. "The states that are closer to being operational—Oregon, Illinois, Connecticut and California—will move forward."

She added, "It is important to remember the DOL provided a clarification on how to proceed; however, governments can move forward without the regulations."

"While states are still free to create state-run retirement plans, they will need to navigate ERISA requirements in doing so," Coulombe agreed.

"Assuming the President signs the measure into law, and the White House has indicated he will, the rollback of the Obama-era safe harbor rules related to [state-run] auto-IRAs introduces significant uncertainty for these arrangements," said Dominic DeMatties, a partner in the Washington, D.C., office of law firm Alston & Bird. "The next move will be what the states do in response."

"In Oregon, OregonSaves will continue to move forward with our pilot program that is launching on July 1 this year," Oregon Treasurer Tobias Read said in a statement responding to the congressional vote. "The need to address the oncoming retirement crisis is too great. This action will not halt our commitment to working Oregonians."

Similarly, California Treasurer John Chiang issued a statement  after the Senate vote, saying he was "more resolute than ever to standing-up Secure Choice so that all Californians can have a dignified retirement." After having consulted with legislative leaders and the state's Office of the Attorney General, "I am convinced that while Congress has dealt Californians a set-back, it is not enough to push us off of our moral and legal high ground."

Illinois Treasurer Michael Frerichs, whose state is working to have its auto-enrollment, payroll-deducted IRA program ready for enrollment by the end of the year, told Pensions & Investments, a trade publication, that with legislation already passed to create the program, "we intend to move forward."

Joshua Gotbaum, chairman of the Maryland Small Business Retirement Savings Program and Trust, said that the state "has been assured by its lawyers that this program is legal and is going to proceed to help provide retirement savings for one million Marylanders," Pensions & Investments reported.

In February, after the House of Representatives passed the rule-repeal measures, Gotbaum told Pension & Investments that the DOL's safe harbor was intended to reassure states based on a conservative interpretation of what ERISA permits. 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."

Court Challenge to Come?

"Eliminating DOL's safe harbors for these plans does not bar states, cities and counties from creating mandates to address retirement savings gaps," wrote Julia Zuckerman, JD, a director at Conduent HR Services and Marjorie Martin, a principal at Conduent's Knowledge Resource Center. "But it may increase the likelihood of court challenges from aggrieved employers arguing that state and local mandates present undue burdens that ERISA intended to bar. Courts may be less inclined to allow these programs in light of Congress specifically rejecting the DOL's safe harbors."

They added, "It remains to be seen if courts will find that these programs interfere with ERISA's goal of uniform national regulations for administration of employee benefit plans."


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