States and large cities can more easily establish their own retirement programs for private-sector workers under new rules the Obama administration announced Thursday, which are aimed at expanding the number of Americans with access to tax-advantaged savings accounts.
The rules may also apply new pressure on financial advisers to lower their fees.
“All Americans deserve a secure retirement after a lifetime of hard work,” Jeff Zients, director of the White House National Economic Council, said on a conference call. “Too many Americans reach retirement age without enough savings to supplement their Social Security checks.”
One-third of U.S. workers currently have no access to an employer-run retirement savings plan, including half of those at firms with fewer than 50 employees and more than 60 percent of part-time workers as of March 2016, according to Labor Department data.
Some state governments have suggested creating savings programs that combine the best features of 401(k)s and pensions to lower costs, provide retirees steadier income and reach workers whose employers don’t offer benefits.
Wall Street opposition
The financial industry, which has already tangled with the Obama administration over a “fiduciary rule” requiring advisers to work in the best interests of clients, has opposed state-run retirement plans for private-sector workers. Eight states have already passed laws to establish such plans.
“There are so many states doing this at this point that they were looking for some finality on this issue,” said Michael Kreps, a principal at Groom Law Group in Washington.
The California State Assembly passed a bill Thursday to establish a retirement savings program in the state for about 7 million workers without access through their employer. The legislation now moves to the Senate for a final vote, according to a statement from state legislator Kevin de Leon.
New York City Mayor Bill de Blasio has proposed the nation’s largest city also create a retirement savings plan. The Labor Department’s announcement Thursday makes the rules final for states and proposes similar rules for large cities.
The Investment Company Institute, which represents mutual-fund providers, and the Securities Industry and Financial Markets Association, known as Sifma, which represents banks, brokerages and asset managers, have previously opposed state-run plans.
Industry trade groups have argued that the plans duplicate services already available in the private sector and that they would burden states with additional costs while creating legal uncertainty.
“We are disappointed with the Department of Labor’s final rule, which exempts state-run retirement programs for private sector employees from vital consumer protections provided by ERISA,” Paul Schott Stevens, ICI’s president and chief executive officer, said in a statement Thursday. ERISA, or the Employee Retirement Income Security Act, set federal rules and standards for companies’ pension plans.
The Labor Department’s rule also “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,” Stevens said.
A spokeswoman for Sifma said it’s reviewing the rule.
The state-run plans are likely to put downward pressure on the fees that financial-services firms charge for managing employee retirement savings. Lawmakers in some states have prioritized lower fees and the scale of a statewide program creates more leverage to demand lower costs. That in turn puts competitive pressure on private-industry plans.
Legislation proposed in some states would cap management fees paid to financial service firms that handle state-run plans.
“To the extent that they can get scale, they can put some downward pressure on fees in the IRA market,” Kreps said of the state-run plans.
The final rules the Department of Labor announced would ease legal risks for the plans by establishing a “safe harbor” from challenge under the federal ERISA law for those that meet certain conditions.
In order to qualify for the safe-harbor protection, participation by employees must be voluntary and the plans must be administered by the state, with the employer’s role limited to basic clerical duties such as collecting contributions through payroll deductions.
Few laws on retirement security have advanced in Congress under Obama, in part because of opposition by the financial services industry. The administration wasn’t successful in securing passage of legislation that would have required companies to automatically enroll workers in retirement accounts. As a result, policy makers in recent years shifted to supporting efforts at the state level to create savings plans for workers who don’t have them at their jobs.
Last year, Obama created a retirement account called a myRA for people without 401(k) plans. The program doesn’t offer matching contributions from employers and doesn’t allow for investing in the stock market, but it also guarantees that participants won’t lose their savings. Savers can invest only in a U.S. Treasury security guaranteed never to lose value.
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