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.