Yesterday, at the White House Conference on Aging, the President unveiled the most important contribution to improved retirement security of his administration: He directed the Department of Labor to start helping state programs that increase retirement coverage. [i] It’s an important change because DoL has historically opposed state efforts to expand coverage for private sector workers, viewing them as an effort to evade the consumer protections of the Employee Retirement Income Security Act (ERISA). If the state efforts are encouraged, rather than discouraged, tens of millions of uncovered Americans could have more secure retirements.
Why is this so important? Because for most people, the difference between security and poverty in their retirement is whether they have some kind of retirement plan. It their employer offers a plan and they’re automatically enrolled in it, some 90% of people who work get a plan. Without that employer support, less than ten percent will do so on their own. However many employers – especially the millions of small businesses – don’t have the resources to set up a traditional plan and don’t want the extensive federal regulation that comes with such plans. That’s why almost half of US workers don’t have one.
Several years ago, the Administration proposed that businesses which did not offer some sort of retirement plan be required to offer their employees a payroll-deduction savings plan. Importantly, the requirement would be limited to offering automatically-enrolled savings for the employees through payroll deduction – there would be no requirement to establish a traditional plan or undergo the extensive regulation they involve under ERISA. This “IRA auto-enrollment” proposal was originally bipartisan[ii], but became associated with the rather different employer mandate in the Affordable Care Act and so went nowhere in Congress.
Various states responded to the inaction in Washington by proposing auto-enrollment programs of their own. Following the title of the first legislation to be enacted, in California[iii], these are generally referred to as “Secure Choice” programs. Although there are various models, the most frequently considered one would have the state require a payroll-deduction auto-enrollment program of those employers currently not offering a retirement plan. Unless employees choose to opt out, a portion of their paycheck would automatically be deposited in a retirement savings plan. The State of Illinois enacted a secure choice plan into law earlier this year and similar bills been introduced in more than a dozen other states.
Until recently, DoL opposed these efforts. [iv] In order to obtain the assent of small businesses, states wanted to guarantee that the new programs would not involve businesses in ERISA’s fiduciary obligations; as a result, legislation in some states specifically provided that the plans could not be subject to ERISA. DoL, for its part, took the view that only plans covered by ERISA had satisfactory consumer protections and that even if the state operated the plan and employers were required to participate, contributing employers would nonetheless remain fiduciaries. This interpretation by DoL has been criticized by some ERISA attorneys[v], but until today there was no evidence the Department would reconsider. The President’s announcement means that DoL will now be an ally of the state efforts – and as a result tens of millions can have more secure retirement.
- “I’ve called on the [DOL]…to provide a clear path forward for states to create retirement savings programs.”
- The original proposal was developed jointly by J. Mark Iwry (then affiliated with The Brookings Institution and now a senior Treasury Department official) and David John (then affiliated with the Heritage Foundation and now at AARP and affiliated with Brookings Retirement Security Project).
- The California Secure Choice Retirement Act, Title 21, Sec. 100014
- E.g., DOL EBSA staff testified before the Oregon Retirement Savings Task Force in June 2014 “that a state-run retirement plan for private-sector workers could create significant liability [under ERISA] for the state and its private employers.” BenefitsPro.com posted January 15, 2015 http://www.benefitspro.com/2015/01/15/state-retirement-programs-face-big-hurdles
DOL, in its Fact Sheet for WH Conference on Aging, says that some parties have argued that the state efforts are preempted by ERISA, but does not mention that DoL itself took that position. http://1.usa.gov/1dWAM01
- Counsel to the California Secure Choice Investment Board sent a detailed memorandum to DoL on April 9, 2015, explaining why they believe the proposed California Secure Choice would be exempt. There has been no known DoL response to the California memorandum.