The financial services industry has been, for the moment, sated by President Trump’s moves to roll back the game-changing DOL fiduciary rule. Now, it’s time to turn its attention to another contentious issue: state-run retirement plans.
For savers, these plans – offered in just a handful of states – are a sweet deal because they automatically enroll workers in plans at companies that don’t currently provide retirement benefits. The automatic IRA deductions are set up at no cost to employees, who are free to opt out.
Financial advisors, however, aren’t so enthused, arguing that a patchwork of state – and, in some cases, city – plans will create confusion and unduly burden employers and plan administrators.
Not surprisingly, state-run plans are a huge hit with state officials who are concerned that less than one-third of Americans aged 65 to 74 have savings in a retirement account — and that those with money saved only have an average balance of $49,000. California officials estimate that 7 million people could be eligible for that state’s plans — and, as such, are worried about Congressional efforts to scrap the federal rules that made them possible.
“I’m disheartened,” said California State Senate Leader Kevin DeLeon in an interview with NPR. “I can’t say I’m shocked, because Wall Street has been gunning to undo these regulations for a very long time. And now, with the Trump administration, they see their golden opportunity.”
Sen. Orrin Hatch introduced two resolutions to this end: S.J.Res. 32 and S.J.Res. 33, both of which would undo the DOL regulation issued in the waning days of the Obama administration that made it easier for states to craft retirement plans. Two companion resolutions are pending in the House of Representatives.
When the DOL passed that rule last year, some predicted it would open the floodgates for similar efforts. They were right. In addition to California, Connecticut, Illinois, Maryland and Oregon are in various stages of developing so-called ”auto-IRA” plans. The idea is currently under review in Vermont, Minnesota, Virginia, Utah and West Virginia, and has been discussed in Colorado, Delaware, Indiana, Kentucky, Maine, Montana, New York, Rhode Island and Wisconsin, among others.
“Rolling the regulations back will give employees and small-business owners more flexibility and freedom to choose how to financially invest and build a nest egg for retirement,” Hatch said in a press release. “Moreover, bipartisan, voluntary solutions exist that would address retirement coverage issues for private businesses and their employees that do not rely on government mandates or government-run plans.”
The Securities Industry and Financial Markets Association (SIFMA) and other trade groups representing the financial services industry are not fans of the plans. For one thing, they are worried about the confusing specter of managing several different regulations, as opposed to a unified federal standard. SIFMA is also worried that employees won’t have the same rights in state plans as federal plan participants. Moreover, there’s currently no guidance as to how the new plans would be regulated under the Employee Retirement Income Security Act of 1974.
“In the case of a state plan created for private sector employees, ERISA would apply,” SIFMA says on its website. “For a plan to be a ‘governmental plan’ exempt from ERISA, it must be established or maintained by a government entity for its employees. A plan for non-governmental employees would not qualify.”
Complying with the state regulations would also place costly burdens on employers to administer the plans – burdens like collecting and remitting contributions, keeping track of those who drop out of and opt into the program and distributing information to the state and participants, according to another trade group, the Investment Company Institute (ICI.
Administrators would also have to follow different rules depending on the type of employee and whether they work full or part time. In comments submitted to Oregon officials about their proposed plans, the ICI urged regulators to provide a permanent exemption for private-sector employers that offer retirement plans to their employees.
In a recent op-ed in The Hill, Alicia H. Munnell, director of the Center for Retirement Research at Boston College and the Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management, spoke out in support of the plans. She argued that the investment industry is opposed to the benefits because they would take business away from 401(k)s.
“Taxpayers are not at risk because these programs consist of individual accounts – thus no issue of un