November 17, 2015 - Bloomberg BNA
DOL Opens the Door for State-Run Retirement Initiatives
By Michael J.
Bologna and Sean
Forbes
Nov. 16 — States seeking to require employers to establish gautomatic IRAsh
and ERISA-compliant 401(k) programs received a green light from the Obama
administration with the release of rules designed to relieve concerns that
state-directed retirement programs would be preempted by the federal
government.
Labor Secretary Thomas E. Perez announced Nov. 16 that his agency had issued
a proposed rule
establishing a new safe harbor from the Employee Retirement Income Security Act
for state-sponsored programs involving automatic payroll deductions for workers
to individual retirement accounts. Illinois, California and Oregon have all
taken steps to establish such programs.
Perez said the department had also published an interpretive
bulletin clarifying that states are authorized to sponsor and administer
ERISA-compliant 401(k) plans for a wide range of businesses. The interpretive
rule specifies that the state, and not the employer, would function as fiduciary
in such retirement saving programs.
Speaking to reporters in Chicago, Perez called states ggreat laboratories of
public policy innovation.h He said that more than two dozen states are currently
considering legislation permitting them to establish savings programs aimed at
the 68 million American workers without access to an employer-sponsored
retirement plan. At the same time, Perez said concerns over potential federal
intervention had caused most states to hesitate.
gFor too long, states have held back from designing and implementing good
ideas in this space because of the specter of ERISA preemption,h Perez said.
gOur goal today is to eliminate that deterrent and to unleash the innovation and
creativity that exists in this state and in so many states. States belong in the
policy-making vanguard, especially on an issue as important as retirement
security.h
The two pieces of guidance are in response to White House frustration with
Congress's inaction on retirement security issues, Michael P. Kreps, a principal
with Groom Law Group Chartered in Washington and previously senior pensions and
employment counsel for the Senate Health, Education, Labor and Pensions
Committee, told Bloomberg BNA..
gThe president has proposed federal automatic IRA legislation for years, but
Congress has not acted. Now, the president is using his executive authority to
do what he can to achieve the same goal—expanding access to the private
retirement system—without Congress,h Kreps said.
President Barack Obama announced in July that the DOL would be developing the
rules.
Legal Challenges
Perez acknowledged that states might face legal challenges, despite the Labor
Department's clarifications. He noted that the department has had discussions
with various constituencies objecting to state participation in the retirement
savings arena.
gThe safe harbor is not an air-tight guarantee,h he said. gThe federal courts
are the ultimate arbiter on the question of whether state retirement plans are
legal or not. But our proposals would provide states with a road map for
minimizing the risk of a lawsuit. We could never eliminate litigation risk. But
we believe we can substantially mitigate litigation risk with this regulatory
proposal.h
The American Retirement Association wasted no time in criticizing the
guidance as creating an anti-competitive environment for retirement plan
providers.
Brian H. Graff, chief executive officer of the ARA, said in a statement that
the proposed rule and the interpretive bulletin gare misplaced attempts by the
Administration to promote coverage by giving marketplace advantages to states as
retirement plan providers, with no reasonably apparent policy justification to
suggest states are somehow going to do a better job providing retirement plan
products. We believe this proposal creates an un-level playing field, and uses
regulation to give state-run alternatives an unfair, and unwarranted competitive
advantage in the retirement plan marketplace.h
The Financial Services Institute, which represents independent broker-dealers
and financial advisers, has previously sought to halt states from developing
automatic enrollment retirement savings programs. FSI has asserted consumers
would be better served by consulting with accredited financial advisers.
The Securities Industry and Financial Markets Association has also been
critical of the initiatives out of concerns that they would be anti-competitive
with private-sector providers.
Perez expressed confidence federal judges would sustain the two guidance
initiatives, saying that for 40 years, the courts have deferred to the Labor
Department on rulemakings under ERISA.
No More eBoogeymen.'
Joshua Gotbaum, an economics scholar at the Brookings Institution and former
director of the Pension Benefit Guaranty Corporation, said the announcement was
a game-changer for states worried for years about two potential gboogeymenh:
whether state-operated automatic enrollment programs would be preempted and
whether employers would be subject to ERISA fiduciary obligations. With both
questions apparently answered, Gotbaum said dozens of states would follow the
lead of Illinois, California and Oregon.
gThis is really important because the Department of Labor estimates there are
just under 70 million with private-sector jobs, but no retirement savings
plans,h Gotbaum told Bloomberg BNA in an interview. gSo if the states tell
employers they have to open up their payrolls, 70 million people will save for
retirement unless they opt out. The British government has done something
similar, and the opt-out rate is something like 10 percent.h
Illinois State Treasurer Michael W. Frerichs, appearing together with Perez,
said the announcement relieves his state from uncertainties expressed by many in
the retirement community when the Illinois Secure Choice Savings Program Act
(Illinois Public Act 098-1150) was being debated by the Illinois General
Assembly late last year. Lawmakers ultimately injected provisions barring
Illinois from implementing the program if it failed to obtain favorable rulings
from the federal government on the ERISA preemption question.
gWe could not get up and running without this proposed regulation today,h he
said.
Frerichs added that the Labor Departmentfs proposed rule would validate the
key features of the Illinois Secure Choice program, which is expected to benefit
1.2 million Illinois workers. He specifically pointed to federal support for
automatic enrollment with freedom for workers to opt out at any time, required
participation for certain employers and a default investment option.
Illinois state Sen. Daniel Biss (D), who sponsored the legislation behind the
Secure Choice program,
praised the DOL for its guidance. gI'm gratified that this guidance indicates
their agreement with our view that the Illinois Secure Choice plan ought to be
able to move forward outside the scope of ERISA,h he said. gBeyond that, I'm
especially grateful that DOL is so actively engaged in this issue, and they
they've sought to maximize flexibility for states that are seeking to expand
access to retirement savings options, while continuing to pay special attention
to consumer protections.h
California Program
California Senate President Pro Tempore Kevin de León (D), who authored his
state's law, said Perezfs announcement clears the way for California's Secure
Choice program to go forward.
gWefve been partnering with the administration for several years to clear any
potential legal roadblocks to implementing Secure Choice,h and gtodayfs
announcement proves our work has really paid off and California along with many
other states will now move forward to help more people enjoy a more dignified
retirement,h de León said in a news release.
Californiafs private-sector retirement savings program could be available to
6.3 million residents in lower and middle-income jobs, de León said.
California officials asked the DOL for guidance on the application of ERISA
to its program more than two years ago because it can launch only if it doesnft
trigger ERISA and the fiduciary responsibilities that could fall to employers.
The DOL announcement could clear the way for the Secure Choice Investment Board
to go to the California legislature as early as 2016 to win approval of a bill
to authorize operation of the program. Since 2012, the board has been
researching the programfs feasibility while awaiting federal guidance.
Comments on the DOL's proposed rule are due by Jan. 19. The proposed rule
(RIN 1210-AB71) and interpretive bulletin (RIN 1210-AB74) are scheduled to be
published in the Federal Register on Nov. 18. The bulletin is effective Nov.
18.
—With assistance from Laura Mahoney in Sacramento, Calif.
To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bna.com
To contact the editors responsible for this story: Phil Kushin at pkushin@bna.com; Jo-el J. Meyer at jmeyer@bna.com
Text of the proposed rule is at http://src.bna.com/5o.
Text of the interpretive bulletin is at http://src.bna.com/5p.
A copy of a DOL fact sheet on the guidance is at http://src.bna.com/5n.