Employers Can’t Match Contributions to State Auto-IRAs

DOL final rule may put employees at risk of saving too little for retirement

By Allen Smith, J.D. Aug 29, 2016
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​Employers cannot match employee contributions to state automatic individual retirement accounts (auto-IRAs), according to an Aug. 25 Department of Labor (DOL) final rule that provides a road map for state auto-IRA laws to avoid Employee Retirement Income Security Act (ERISA) pre-emption. 

The rule "is clearly intended to give a green light to state programs and eliminate ERISA fears," said Joshua Gotbaum, a guest scholar in economic studies with the Brookings Institution, a nonprofit public policy organization based in Washington, D.C. However, the rule's limitations on employers' involvement in state auto-IRAs prevent employers from contributing to them. And under the final rule, states can't establish traditional pensions or even a 401(k), Gotbaum noted. 

"This means that individual employees can save but will remain at risk of saving too little or running out of money by living 'too long,' " he said. "Expansion of retirement coverage is an important advance—more important than anything else that Washington has done in decades—but it would be nice if that expansion weren't limited to the weakest retirement vehicles."

Eight states—California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, Oregon and Washington—have enacted state auto-IRA laws. These states have taken action, while Congress has blocked President Barack Obama's proposal to automatically enroll workers nationwide in IRAs when the employees don't have access to a workplace savings plan. With the rule providing guidance for how to avoid ERISA pre-emption, the DOL expects more states to create their own auto-IRA programs.  

Reasons for State Auto-IRA Laws

Of the nation's 114 million private-sector workers, 34 percent—39 million—do not have access to a retirement plan through work, according to July 2016 Bureau of Labor Statistics data. Less than 10 percent of all workers contribute to a retirement plan outside of work.

Secretary of Labor Tom Perez has indicated that state auto-IRA programs help give more workers a chance to retire in dignity.

"For older Americans, inadequate retirement savings can mean sacrificing or skimping on food, housing, health care, transportation and other necessities," stated the DOL in the rule's background section. "In addition, inadequate retirement savings places greater stress on state and federal social welfare programs as guaranteed sources of income and economic security for older Americans."

Consequently, states have a substantial interest in encouraging retirement savings. This has prompted some state governments to expand access to savings programs for their residents by creating their own programs and requiring employer participation, the DOL noted.

Safe Harbor from Pre-Emption

The rule provides that to ensure that ERISA doesn't pre-empt a state auto-IRA law, a state must:

  • Provide for a limited employer role. Employer activity must be limited to such ministerial activities as collecting payroll deductions, sending them to the state program, providing official state program notices to employees, maintaining records of payroll deductions and remittance of payments, providing information to the state necessary for the operation of the program, and distributing state program information to employees.
  • Establish and administer the auto-IRA program. The state must be responsible for investing the employees' savings, for selecting investment alternatives from which employees may choose, and for the security of payroll deductions and employee savings. The state may contract with service providers to administer the program.
  • Make employee participation in the program voluntary. Because the program must be voluntary for employees even if it includes automatic enrollment, employees must be given adequate advance notice and have the right to opt out.
The rule "doesn't eliminate all possibility of lawsuits" challenging the programs as pre-empted by ERISA, Perez said. "But it goes a long way to mitigate litigation risk."

In addition to the final rule for state auto-IRAs, the DOL issued a proposed rule for large cities and counties also interested in offering auto-IRAs. The proposed rule suggests that a safe harbor from ERISA pre-emption might be extended to cities or counties with a population equal to or greater than the least populous state, Wyoming, which had approximately 586,107 residents as of 2015. 

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