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