Industry trade groups are taking issue with the Department of Labor’s plan to boost workers’ access to retirement plans through state-run programs, with the Investment Company Institute and the Securities Industry and Financial Markets Association arguing that the plan will spur a “confusing, state-by-state patchwork of savings programs” that could lack strict federal controls.
Complying with a directive from the White House, DOL released on Nov. 16 a proposed rule and interpretive bulletin to help guide states in developing state-run retirement plans that don’t run afoul of the Employee Retirement Income Security Act. Comments were due on the plan by Jan. 19.
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,” noting that there are nearly 70 million workers without access to retirement plans at work.
DOL is proposing to update the Employee Retirement Income Security Act by instituting a safe harbor describing circumstances in which a payroll deduction savings program, including one with automatic enrollment, would not be considered an employee pension benefit plan under ERISA.
Lisa Bleier, managing director and general counsel for SIFMA, told DOL in a comment letter that DOL’s safe harbor exempting certain employee benefit plans from complying with ERISA is “counterproductive to achieving that objective by eliminating important protections provided under ERISA and discouraging employers from voluntarily establishing more substantial plans for employees.”
While SIFMA agrees that Americans should be saving more for retirement, Bleier said, the retirement savings “is not due to a lack of affordable options, but a lack of education on the importance of saving. State-run plans are not the solution to our saving problem and by granting states a safe harbor, the DOL will only make a flawed policy even worse.”
While DOL’s plan could lead to 50 different state plans throughout the country, it also places “an additional cost burden on states and crowds out the private market,” Bleier argued. “States would be highly unlikely to provide the same level of education, service and guidance as private sector providers.”
The Mandatory Auto IRA within the plan will also “discourage business owners from providing more expansive and substantive retirement plans,” she said. “By setting a minimum requirement, employers will take this option as the easy way to avoid creating 401(k), SEP or SIMPLE plans, which offer greater saving options to employees.”
The federal government should focus on encouraging employer sponsored plans to help individuals save for retirement, Bleier said.
Employer limits will make saving harder for employees, as the proposal prohibits a matched contribution or other monetary incentive to participate. Data shows that while auto enrollment increases overall participation, it does not increase the savings rate. Auto-enrollment is not enough. The focus needs to be on educating individuals about the importance of saving for retirement.
An ERISA exemption for states could also lead to different rules for different states, “which can be confusing and complicated for employees who move from one state to another or those who live in a state different from the one in which their employer operates,” Bleier said.
ICI agreed in its comment letter, stating that DOL’s plan could result in a “scheme of retirement savings programs that vary state by state — without any clear benefit and with potential harm to our current national, voluntary retirement system.”
Instead, policymakers “should pursue national solutions to achieve expanded coverage, building on the current voluntary system,” ICI argued. ICI also maintains that DOL’s plan would give a “competitive advantage to the state-run payroll-deduction IRA arrangements excluded from ERISA” by allowing those state-based programs to provide for automatic enrollment and escalation of contributions — features not available for such programs offered through the private sector.
Under separate guidance accompanying DOL’s proposal, states would also be allowed to sponsor an open multiple employer plan. In an open MEP, otherwise unrelated employers jointly sponsor a single plan. Existing DOL guidance generally precludes private businesses from sponsoring open MEPs for unaffiliated employers.
The American Retirement Association stated when DOL’s plan was released that DOL’s “sub-regulatory guidance” on MEPs, which became effective immediately when DOL released the plan, would allow states to sponsor retirement 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.”
While SIFMA commended DOL for stating that “plans cannot require that an employee retain any portion of IRA funds and cannot impose restrictions on withdrawals or impose any cost or penalty on transfers or rollovers” in the plan, SIFMA believes the “no restrictions” requirement needs further analysis.
SIFMA told DOL to issue a “model notice for employers,” which would include information about the accessibility of the money in the IRA and the tax and penalty implications of transactions, as well as include information about who is managing the assets, options for investing, and a point of contact for questions about their IRA.
SIFMA said it also recommends that states be considered a “co-fiduciary” under ERISA, “since the state is responsible for investing the employee savings or for selecting investment alternatives for employees to choose.”
— Check out 10 Best States for Employee Retirement Plans on ThinkAdvisor.