The U.S. government recently announced a final rule to help state governments, and later some municipalities, set up novel government-sponsored IRAs for employees who don’t have access to retirement plans where they work. These plans are designed to help the one-third of all workers have no workplace retirement savings arrangement. However, the final rule and corresponding state legislation are not without controversy  

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State Auto-IRAs: New Idea for Retirement Security

Mon Sep 19, 2016

68 million. That’s more than the population of the United Kingdom. And of France. And almost the total number of fans that attended all Major League Baseball games last season. Every game. Every ballpark.

68 million is also the number of U.S. workers the Department of Labor says have no access to an employer-sponsored retirement plan like a 401(k) or pension. It means that over one-third of all workers have no workplace retirement savings arrangement.

And it’s why the U.S. government recently announced a final rule to help state governments, and later some municipalities, set up novel government-sponsored IRAs for employees who don’t have access to retirement plans where they work.

The August 25 final rule, which takes effect in 60 days, creates a roadmap for state governments to establish governmental retirement savings “Auto-IRAs” for employee pre-tax retirement contributions.

Workers would be automatically enrolled in these public retirement plans by employers who do not give workers access to a workplace retirement plan. State law would mandate that these employers collect payroll deductions, remit funds to the governmental retirement plan, provide information to employees and maintain records of payroll deductions and remittances.

Although state laws would provide for mandatory automatic enrollment, employee participation in state-sponsored retirement programs would be voluntary. Where a state law required employers to automatically enroll employees and make payroll deductions, the law would also have to give employees “appropriate notice” and the right to opt-out. Employees would “own” their IRAs and have the ability to make withdrawals as under normal IRA rules.

Secretary of Labor Thomas Perez said the government guidance “is another plank in the economic security platform that President Obama and this administration has been building to help create savings opportunities.”  

While California, Illinois, Maryland, Oregon, Colorado, Connecticut, New York and Louisiana have enacted or are considering legislation, the Labor Department says that a “serious impediment” to such measures has been uncertainty about the 1974 ERISA “pre-emption of state laws that relate to private sector employee benefit plans.”

The final rule therefore creates a “safe-harbor for state laws that require employers to facilitate enrollment in state-administered payroll deduction IRAs.” Specifically, “state-required payroll deduction auto-IRA” programs consistent with the final rule would not be considered employee pension benefit plans under ERISA, according to the Labor Department.

In creating a “State Savings Program for Non-Governmental Employees,” the final rule breaks remarkably new ground in employee retirement benefits. These plans would have to be “established and administered by a state pursuant to a state law,” and the state would be “responsible for investing the employee savings or for selecting investment alternatives” to which the employee could direct funds.

In that sense, the final rule establishes parameters for a public option employee retirement savings plan not unlike the “public option” that former Secretary of State Hillary Clinton has proposed for Affordable Care Act health insurance exchanges.

To be sure, the final rule and corresponding state legislation are not without controversy.

First, employers that do not offer workplace retirement savings plans are likely to be small businesses and nonprofit organizations. State laws will no doubt place new compliance and administrative mandates on these employers, including possible exposure to governmental enforcement actions. These employers are likely to be grappling with new federal overtime rules as well as minimum wage increases in these same states.

Second, as the American Benefits Council has pointed out, even in the case of larger employers who do offer 401(k)-type plans or pensions, not all employees are eligible to participate. State legislation will need to address whether these employers could also be drawn into the net of mandatory automatic enrollment—e.g., of part-time employees.

Third, without question, the courts will ultimately need to decide whether the final rule’s “safe-harbor” circumstances do not conflict with ERISA preemption of state employee retirement benefit laws. Employers and employer associations will question whether this well-meaning initiative may collide with ERISA preemption standards that have stood the test of time for over forty years.

Finally, as has occurred with the Affordable Care Act, concern is likely to be expressed about taxpayer-subsidized governmental plans competing with private retirement plans. The “public option” could represent a threat to financial institutions long involved in retirement plan administration—particularly where state government officials have the authority to direct employee investments.

Notwithstanding these and other serious objections, the fact remains that 68 million workers currently have no access to workplace retirement savings opportunities. Many, of course, are temporary or part-time employees, or young workers not yet focused on retirement. Nevertheless, many millions could approach retirement one day totally dependent on a Social Security system on shaky financial ground.

The Labor Department has offered an idea—state government Auto-IRAs—that could fill a glaring gap in employee retirement income security. Employers, employee benefit and human resources professionals, financial leaders, state governments, the U.S. Congress and the next President all need to participate in finding a solution.