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DOL’s final rule gives push to government retirement plans for private-sector workers
Business groups responded with skepticism to the federal government's push to allow individual states to create and run defined contribution plans for private-sector employees.
The Department of Labor (DOL) published a
final rule on Aug. 30 outlining how state governments can create and maintain payroll-deduction individual retirement account (IRA) arrangements for private-sector workers. These retirement plans are to be exempt from compliance with the Employee Retirement Income Security Act (ERISA) if certain conditions are met, including the state's assuming financial responsibility for the security of the employees' savings.
growing number of states have recently enacted state-sponsored retirement initiatives for private-sector workers, including state auto-IRAs. These programs have varying mandates requiring employers that don't offer 401(k) or similar defined contribution plans to participate by making automatic payroll deductions on behalf of employees who don't opt out, and then remitting these funds to the state-administered programs (see the
SHRM Online article
Employers Can't Match Contributions to State Auto-IRAs).
"While primarily relevant to employers that do not sponsor their own retirement savings plans, state-run retirement programs may affect employers with plans that impose eligibility restrictions," according to
an analysis by Xerox HR Services. For example, state laws "could require employers to automatically enroll into state-run IRAs any of their employees who are not eligible to participate in the workplace program because they have not yet met the plan's minimum service requirement." Also, depending on program design and an employer's demographics, "some employers may find themselves subject to more than one state-run program."
"Due to congressional inactivity in the retirement space, it is not surprising that state legislatures are taking action to shore up the coverage gap," said Will Hansen, senior vice president for retirement policy at The ERISA Industry Committee (ERIC), a Washington, D.C.-based organization representing large employers that sponsor employee benefit plans. But "while the state legislatures may have good intentions, these actions could lead to exactly what ERISA was implemented to prevent—a patchwork of 50 state laws."
Hansen said that states are following three different approaches to help employees who lack access to a workplace 401(k)-type plan save for retirement: facilitating employer-provided ERISA-compliant retirement plans; offering state-run non-ERISA plans, such as auto-IRAs; and creating online marketplace platforms to encourage competition among retirement plan providers.
"Under a prototype plan, the state could control the master plan document and the employer would make selections, such as contribution rates and investments, and generally be the fiduciary for administrative and investment practices.," Hansen said. "This option is not desirable for most small employers due to fiduciary liability, which carries an increase in responsibilities on the employer to follow a number of federal laws and regulations."
In programs through which states facilitate a multiple employer plan (MEP), "the state would be the administrator of the plan and would take on fiduciary liability for administrative and investment purposes. This option could be seen as more advantageous since it relieves the employer of most fiduciary liability, but the downside is a lack of control over certain aspects of the plan," Hansen said.
Massachusetts, for one, has followed this model.
"Most states would prefer to avoid a plan that falls under ERISA due to the legal risks and costs of operating the plan," Hansen said.
Oregon have taken this approach.
To avoid triggering ERISA, the employer's role in the state-run plan must be minimal, Hansen added. "The employer must simply communicate the plan to its employees and handle the proper deductions and transmission of deductions to the IRA provider."
But the prospect of state-run retirement programs that are exempt from the multitude of compliance and reporting obligations under ERISA has provoked much criticism from employers.
"Oddly enough, this is the same Department of Labor that has just imposed a massive new set of 'fiduciary' regulations—projected to cost retirement savers $109 billion over the next 10 years—on private-sector retirement plans, IRAs and their advisors," commented Paul Schott Stevens, president and CEO of the Investment Company Institute (ICI) in Washington, D.C., which represents financial services firms. "Yet the DOL now plans to turn a blind eye on the track record of mismanagement and abuse in state-run programs—whether public-employee pension plans or municipal securities disclosure—and exempt new state plans from bedrock investor protections that the private sector has been subject to for 40 years."
"There are a lot of issues [with state-run plans for private-sector employees] that remain unexplored—not just unresolved, but unexplored," added David Blass, ICI's general counsel. "The Department of Labor has granted significant exemptions to the states for the retirement savings laws—ERISA—and we don't know how the federal securities laws are going to apply to these plans. What protections are there for the people who are putting their money away, their retirement savings away, in these plans? We simply don't know at this stage."
"Unfortunately, the final regulation [creates] an unlevel playing field for the private sector compared with the latitude the final regulation provides the state-run alternatives," said Nevin Adams, J.D., who is chief of marketing and communications for the Arlington, Va.-based American Retirement Association (ARA), which represents retirement plan sponsors.
Additionally, Adams said that the final rule "removed restrictions that would have prohibited states from imposing any restrictions—direct or indirect—on employee withdrawals" from the plan. That, he added, "would interfere with the states' ability to guard against 'leakage,' " which occurs when employees take money out of a plan prior to retirement.
Private-sector 401(k) plans, in contrast, strictly limit the conditions under which active employees can remove money from their plans via
loans or through
hardship withdrawals, although employees' ability to
cash out when they change jobs is cited as a major factor that drains away retirement savings.
For example, "Washington state enacted legislation to create an online marketplace to help small businesses offer a retirement plan to employees," ERIC's Hansen explained. Under the state's
Small Business Retirement Marketplace, "Qualified vendors will be able to offer low-cost retirement plan options to businesses with less than 100 employees."
Rather than that competitive market-based approach, however, more states seem inclined to require employers without a retirement plan to automatically enroll their employees into a state-mandated program.
A Growing Trend, with Consequences
While only a handful of states have actually implemented a state retirement plan or marketplace, Hansen noted, "This number is likely to increase, especially with the DOL's final rule to ensure certain plans do not need to follow the requirements under ERISA."
Unfortunately, "the logistics could be a nightmare depending on the strength of the company's HR and payroll systems," Hansen warned. "And the nightmare may continue if the state does not provide enough guidance on the minimum requirements that must be associated with the retirement plan."
A similar concern was expressed in a letter from the American Retirement Association to the DOL's Employee Benefits Security Administration, sent on Sept. 27, which stated that "the proposed extension of the new 'safe harbor' to state political subdivisions [see below] will be problematic on public policy grounds.... It would potentially subject an employer's payroll savings program to mandates that could vary significantly from one town to the next."
Proposed Rule Would Let Cities Launch Private-Sector Auto IRAs
The Department of Labor
also issued a proposed rule that would allow cities, counties and other large political subdivisions to run auto IRA programs and to require employers that don't offer an employee retirement plan to participate in them. The rule is expected to be finalized by the end of the year. [The DOL's
final rule was published in the
Federal Register on Dec. 20, 2016, becoming effective 30 days later.]
Similar to the DOL's final rule for state auto IRA plans, the rule clarifies that "political subdivisions" of states--city- and county-sponsored retirement plans offered to private-sector employees would be exempt from ERISA if they maintain authority under state law to compel private employers to participate in a payroll deduction savings plan; serve a population equal to or greater than that of the least populous state; and reside in a state that lacks its own auto-IRA program.
The DOL said it is considering—and invited comments on—an additional requirement that the political subdivision have a "demonstrated capacity to design and operate a payroll deduction savings program," such as maintaining an existing pension plan for employees of the subdivision.
Update: "The outgoing Obama administration was instrumental in prompting the DOL to provide its state and local government-coordinated plan guidance," states
an overview of the final rules by financial services firm Ascensus. "It is not clear how the incoming Trump administration may feel about such programs."
Related SHRM Articles:
California Employers to Auto-Enroll Workers in Retirement Plan,
SHRM Online Legal Issues, October 2016
DOL Encourages State-Run Retirement Programs,
SHRM Online Benefits, December 2015
Commentary: State-Run Retirement Plans Are Not a Complete Solution, Morningstar, September 2016
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