Complying with a directive from the White House, the Department of Labor on Monday released a proposed rule and interpretive bulletin to help guide states in developing state-run retirement plans that don’t run afoul of ERISA.
Noting the nearly 70 million workers without access to retirement plans at work, Labor Secretary Thomas Perez said in releasing the plan that employees’ inability to save through work is not only a “potential financial crisis for these individuals and their families, but a critical economic issue for the nation.”
Monday’s guidance, Perez said, “is another plank in the economic security platform that President Obama and this administration have been building to help create new savings options, ensure workers are getting sound retirement advice, and bolster bedrock programs such as Social Security.”
DOL filed Sept. 3 with the Office of Management and Budget its proposed rule designed to make it easier for states to offer their own retirement plans without running afoul of the Employee Retirement Income Security Act.
During the White House’s Conference on Aging, held in July, President Barack Obama directed Perez to publish a proposed rule to “provide a clear path forward for the states to create retirement savings programs” by year-end.
Specific to the proposal is a new safe harbor from ERISA for state-sponsored IRAs that conform to certain provisions. The proposal would adopt a standard stating that state-sponsored payroll deduction IRA programs must be “voluntary” for workers, rather than “completely voluntary” as defined in a 1975 rule.
“This will allow for automatic enrollment of employees in such programs so long as they are given the ability to opt out, and employers are minimally involved,” DOL states.
For instance, “employers would make the automatic deductions from employee paychecks, but the employees and states would retain control of the program and IRA accounts,” DOL says. “Employers could not prevent workers from declining to participate in the program.”
Comments on the proposed rule are due by Jan. 19.
DOL also published an interpretive bulletin regard creating state-based ERISA-compliant 401(k) plans that are open to businesses and workers. In addition to payroll deduction IRAs and state-based 401(k)s, the bulletin provides examples of how to create state retirement savings programs that may avoid being preempted under ERISA.
Illinois Treasurer Michael Frerichs said that nearly 1.2 million workers are poised to benefit from Illinois’ state-run plan, the Secure Choice Retirement Savings Program. “With these new federal rules, my administration can move forward with helping some of our state’s most vulnerable workers,” Frerichs said.
While automatic IRAs and state-based ERISA plans have been created, or are being considered, by various states, DOL says, the lack of clarity in how to develop state-run plans has made other states “reluctant to move forward” with their own plans. DOL said its Monday guidance “is meant to give states clear information as they move forward in creating programs.”
Similar state-run initiatives to Illionois’ are underway in Oregon and California, with Washington launching earlier this year a small plan marketplace. Approximately half the states are currently considering state-run measures, according to the American Retirement Association, which takes issue with allowing state-run plans.
DOL’s proposal “modifies the current payroll deduction safe harbor to allow automatic enrollment provisions without making the plan an ERISA arrangement, if there is a mandate to offer the plan and the state program is the default option,” ARA said in a Monday statement. “This would now allow states to mandate these offerings without the protections and fiduciary oversights ERISA provides.”
While some state-run programs, notably Illinois', allow a traditional ERISA retirement plan, such as a 401(k), to satisfy the mandates, DOL’s proposal “would extend an ERISA shield without that option,” ARA says.
ARA also argues that DOL’s “sub-regulatory guidance — which is effective immediately — would allow states to sponsor retirement multiple employer plans (MEPs) for employers operating in the state,” which “stands in sharp contrast to the Labor Department’s longstanding reluctance to enthusiastically embrace or sanction the use of these so-called ‘open’ MEPs for these programs in the private sector.”
ARA, Graff continued, believes the DOL proposal “creates an un-level playing field, and uses regulation to give state-run alternatives an unfair, and unwarranted competitive advantage in the retirement plan marketplace.”
However, Nancy LeaMond, AARP's executive vice president, said DOL's proposed rule "provides greater clarity and sends a strong signal that states should continue to pursue solutions for workers who are well behind in their savings."
The state plans, what AARP calls "Work and Save," provide "a dynamic route to retirement savings for millions in the private sector, in partnership with private sector employers and state government,” she added.
The Investment Company Institute, meanwhile, expressed its "deep concern" that the administration is pursuing "policies that could fragment and undermine our nation’s voluntary retirement system for private-sector workers."
More retirement plan access to workers, ICI argued, "should be provided through national legislation that builds on the current voluntary system, not through a confusing patchwork of state programs, and with the cooperation — not coercion — of employers who best know the demographics and needs of their workers."
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