The Department of Labor's green light for states to set up private-sector retirement savings programs also has raised the prospect that some cities might follow suit.
A final rule issued Aug. 25 by the DOL granted a safe harbor, under certain conditions, for states to set up payroll deduction individual retirement accounts for private-sector workers who do not have access to workplace retirement savings programs.
Pressed by some cities and retirement advocates to do more, DOL officials also proposed that other governmental entities be allowed to offer such programs. “The department believes that well-designed political subdivision-level payroll deduction savings programs have the potential to effectively reduce gaps in retirement security,” the proposal noted.
With a tight one-month deadline for comments on the proposed rule and just four months left in the current administration, the chances of it being finalized are slim. But even the possibility of an expansion could have an important impact, advocates say.
“It may ultimately create pressure for additional states” to consider setting up their own programs, said Cristina Martin Firvida, director of government relations for economic security with AARP, which works with policymakers.
New York, Philadelphia and Seattle already have signaled their interest by asking the Department of Labor to extend the safe harbor.
“The fact that the DOL has recognized the interest is going to have a positive effect in sparking the conversation between cities and states. (DOL officials) have shown their dedication” to improving retirement security, said Angela Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University's McCourt School of Public Policy in Washington. She sees the proposed expansion as “a great next step in what is going to be a longer journey.”
For Philadelphia Controller Alan Butkovitz, the proposed extension “is extremely helpful.” With political gridlock at the state level, “the fact that there's aggressive federal action is very positive. It will be helpful to allow the city to take some practical steps on an issue this important. I think local action and federal action will dovetail very well,” he said in an interview.
8 states pass laws
So far, eight states — California, Connecticut, Illinois, Maryland, New Jersey, Oregon, Massachusetts and Washington — have passed laws to create state-administered retirement savings programs for private-sector workers. Pew Charitable Trusts reported that at least half of all states are implementing or considering retirement savings options for private-sector workers who do not have access through their employers, or to improve retirement readiness.
Three options that states are considering are programs that would be set up under federal Employee Retirement Income Security Act guidelines, non-ERISA programs that allow workers to make payroll contributions to IRAs and marketplace websites that help employers set up their own plans.
The DOL addressed the three approaches in an interpretive bulletin issued in November, along with its proposed safe harbor rule for states that is now final. For state-run plans, the bulletin said ERISA would not pre-empt state laws if employers participated voluntarily, among other conditions.
Conversely, state-run payroll-deduction IRA programs would not fall under ERISA if employer participation were a requirement, not a choice, despite the urging of many states to also allow voluntary automatic enrollment. And reversing years of wariness about multiple employer plans, which allow unrelated employers to share a plan, the DOL bulletin said those would now be allowed.
In the proposed expansion, the same principles would apply for cities and other qualified political subdivisions, DOL said.
In order for a political entity to qualify, there can not be a program at the state level, it must have authority under state law to mandate employer participation, and it must have a population equal to or larger than the least populated state, which as of the 2013 census was Wyoming, with fewer than 600,000 residents.
DOL officials estimate 88 political subdivisions could fit those criteria, although “some may not consider themselves qualified in a practical sense.” The DOL asked commenters to weigh in on whether it should require a political entity to demonstrate its capacity to design and run a program.
The proposal does not address every possible program, nor does it preclude local governments from pursuing other ideas outside the safe harbor.
It does try to address some concerns raised by employer and financial services advocacy groups about a conflicting patchwork of laws, and acknowledges that some employers will have to deal with multiple jurisdictions and face increased compliance costs as a result. On the other hand, the proposal notes, multijurisdiction employers are more likely to have ERISA-covered plans and would not be affected.
As the comments start to filter in, some cities are not waiting.
Philadelphia has a working group considering possible approaches and a public outreach initiative that includes listening tours and town hall meetings.
“We want to stimulate the conversation in Philadelphia about getting more adequate retirement,” said Mr. Butkovitz. His office noted in a May report that “the negative consequences of inadequate retirement savings will be most severe at the local level,” as unprepared seniors rely more on public assistance and spend less in the local economy, posing a risk “to the fiscal and economic health” of the city itself.
Mr. Butkovitz is encouraged that several members of the City Council “immediately recognized that this is a trending problem,” and that the business community is willing to participate. “I think we are part of a movement that says, "Wait a second, retirement systems exist because there's a real need,'” he said.
No doubts for NYC
For New York City, where the mayor, city comptroller and public advocate all urged DOL officials to let cities set up programs, there is no doubt about the merits of the proposal.
“In our opinion, our extensive financial management expertise and the existing legal authority to operate retirement plans argue for the inclusion of New York City and comparable municipalities” in the safe harbor, New York City Comptroller Scott Stringer wrote to the DOL earlier this year.
With more than 1 million workers eligible for retirement programs, city officials also would like to sponsor programs that would be covered by ERISA, such as multiple-employer plans, said Mr. Stringer, trustee of the nation's fourth-largest pension system with more than $160 billion in assets.
This article originally appeared in the September 5, 2016 print issue as, "Municipalities ready to join rush to private-sector plans".