Labor Secretary Tom Perez. (Photo: AP)

The Department of Labor issued final rules Thursday to help states develop payroll deduction IRA plans that don’t run afoul of the Employee Retirement Income Security Act, and issued a proposed rule to allow some larger cities to create retirement savings plans.

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 for private-sector workers. Comments were due on the plan by Jan. 19.

Labor Secretary Thomas Perez said on a Thursday morning call with reporters that while eight states – California, Connecticut, Illinois, Maryland, New Jersey, Oregon, Massachusetts and Washington – have already passed legislation creating their own retirement savings plans, other states have voiced concerns about how to create plans that didn’t pre-empt ERISA.

“We heard from a number of states interested in doing this [setting up their own plans] … that if they did this they would be pre-empted by ERISA and it would appear that they were mandating these proposals,” Perez said on the Thursday morning call. States have been concerned about how to “establish a voluntary plan consistent with ERISA preemption principals. We believe we have provided that roadmap, and this [final rule] will enable states to set up those voluntary programs.”

The eight states that have developed their own plans is “nearly double where we were last July,” Perez said.  

Jeffrey Zients, director of the National Economic Council and assistant to the president for economic policy, added on the call that while the administration has made progress, DOL’s fiduciary rule will “allow many workers to be better prepared for retirement, …“one-third of workers lack access to a workplace retirement savings plan, including half of workers at firms with fewer than 25 workers. Congress has refused to act; today we’re taking a major step so workers can save for retirement at work.”

Take just Maryland and Connecticut as examples, Zients said. “In these two states alone, 1.5 million people will be automatically enrolled in an IRA” through work, he said, and “if all states” had such plans, “tens of millions” will be able to save for retirement.

The California legislation, S. 1234, creating the California Secure Choice Retirement Savings Act, was sponsored by Sen. Kevin DeLeon and passed the State Assembly Thursday by a 52-26 vote.

Industry trade groups like the Investment Company Institute and the Securities Industry and Financial Markets Association have come out against state-run plans, arguing that they will spur a “confusing, state-by-state patchwork of savings programs” that could lack strict federal controls. The Financial Services Institute released a statement today saying that while DOL’s intentions were laudable, “we have concerns about the unintended consequences this rule may have for small business, the states and investors.”

ICI noted its “disappointment” with the final rules issued Thursday, stating that DOL’s final rule “has removed conditions that would have prohibited states from imposing any restrictions on employee withdrawals from their individual retirement accounts. This ‘Hotel California’ provision effectively allows states to ‘lock in’ employees and their savings, barring workers from moving their own money to private-sector IRAs that offer lower costs and a broader range of options.” ICI said would review the final text of the rule to see what other changes were made.

The Financial Services Institute also noted its concern with the final rules, stating that “the leading reasons for not saving for retirement – a lack of income or other pressing financial needs – will not be addressed by state-run plans.” FSI is “also concerned that some employers may choose to drop strong existing plans in order to reduce their costs. This would be harmful to impacted workers because state-run plans do not provide for the matching funds that common in employer-based plans.”

DOL’s final rule provides that a state retirement savings program is not an ERISA plan and hence unlikely to be pre-empted by ERISA if the program is established and administered by the state, provides for a limited employer role, and is voluntary for employees.

Under the proposed rule, a city can create its own retirement savings program provided it has the authority under state law, its population is equal to or greater than the population of the least populous state (currently Wyoming, with an estimated 586,000 people in 2015, according to Census data), and the state does not have its own retirement savings program.

DOL is soliciting comments on the proposed rule, which expands the final rule to cover qualified city and county programs, specifically asking for feedback on whether the final rule should be expanded, what limitations should be imposed on the size or types of political subdivisions that would qualify, and whether the final rule’s conditions should differ if applied to political subdivisions.

— Check out DOL Fiduciary Rule Heads to Court, and Here’s What to Expect on ThinkAdvisor.