The comment period for the Department of Labor’s proposed safe harbor that intends to make it easier for state’s to mandate participation in retirement plans closed Tuesday.
That proposed safe harbor says mandatory state-run programs would not be subject to the Employee Retirement Income Security Act.
Under the proposed safe harbor, states would not be permitted to mandate employer contributions, and employees must have the option to opt out of the plan after being automatically enrolled.
So far, comments from service providers have been limited. The DOL had only posted 14 comments as this story went to print, though more are likely to post after the official close of the public comment period.
Count Voya Retirement as the first service provider to go on record against both the DOL’s safe harbor, and the idea that such state-run plans can adequately address the lack of comprehensive access to workplace retirement plans.
“A 50-state patchwork of government-administered retirement savings vehicles with inconsistent state and local regulations, low annual contribution limits, no opportunity for employer contributions and limited access to retirement planning and advice ,” will do little to impact the current retirement crisis, writes Voya Retirement CEO Charles Nelson in the company’s comment letter.
The creation of such a patchwork “would take momentum away” from efforts in the private sector to expand access, which Nelson thinks regulators could and should better support.
Where the DOL is hoping to address a regulatory technicality with the safe harbor proposal — that state-run plans will not be preempted by ERISA — what the Department is actually doing is “flipping a switch” that will enable an entire new state-mandated retirement system to grow.
That system will be over weighted with inefficiencies, thinks Nelson.
For starters, the state-run plans the safe harbor encourages will defer savings to IRAs, which of course limit annual contributions to $5,500 annually.
Coupled with the fact the employers would not be allowed to contribute to the state-run plans, and the contrast between a potential state-run option and a standard 401(k) plan, which allows up to $18,000 of annual deferrals as well as employer contributions, is stark, says Nelson.
“The Department’s goal of increasing the retirement readiness of the currently underserved population would be met more effectively by identifying and addressing the reasons why small employers are often hesitant to make 401(k) and similar plans available to their employees,” says Nelson.
Furthermore, the DOL’s proposed state-run safe harbor is in direct contradiction with its proposed fiduciary rule.
While the state-run safe harbor proposes to limit ERISA’s scope on the small businesses most likely to participate, the DOL’s proposed fiduciary rule would expand the definition of fiduciary on plans with 100 or fewer participants.
“The Department now has two pending proposals that would move in opposite directions for the underserved small-employer market,” notes Nelson.
“Where private industry provides solutions, the Proposed Fiduciary Standard would tighten ERISA’s application, enhance the burdens on service providers and others, and, in our view, have the effect of restricting, not increasing, access to retirement solutions in the underserved market,” said Nelson.
“Where state governments provide solutions, the Proposal would provide a blanket exemption from ERISA for retirement plans offered to the very workers that it seeks to protect with the Proposed Fiduciary Standard,” he added.
In effect, the Department is increasing barriers to private sector access with the fiduciary rule, while eliminating barriers for state-run plans with its proposed safe harbor.
Once established, the state-run plans would be difficult to dismantle, warns Nelson.
In lieu of state-run programs, he lays out a game plan for regulators to help facilitate access to the private sector plans he thinks would better address retirement savings shortfalls.
Existing safe harbors for Simple IRA plans and Safe Harbor 401(k) plans require employer matches of small business sponsors and immediate vesting. Both discourage small business from adopting or continuing plans, argues Nelson.
Allowing a more flexible matching schedule would encourage wider employer adoption.
And eliminating immediate vesting requirements would encourage small business adoption by allowing sponsors to use retirement plans to incentivize loyalty by discouraging employee turnover.
Also, removing existing restrictions on multiple employer plans would accelerate small business adoption of private sector plans, says Nelson.
In the letter, Nelson calls on the DOL to withdraw its proposed safe harbor for state-run plans “entirely.”
Voya’s Retirement business administers about $346 billion in assets for nearly 5 million participants in 46,000 plans.