The Department of Labor should not apply ERISA in two different ways, but it appears to be doing so.
On the one hand, on April 6 last year, it adopted the fiduciary rule subjecting any investment recommendations by broker-dealers and other retirement service providers pertaining to retirement-related accounts to fiduciary standards like those of the Employee Retirement Income Security Act.
On the other hand, the department provided a safe harbor from coverage under ERISA to state- and city-sponsored automated payroll-deduction individual retirement accounts for private-sector employees (sometimes known as secure choice plans), which would reduce protections for participants in these plans.
Since the Labor Department's ERISA exemption, states are moving full-speed ahead with their secure choice programs, while the provision enables big cities in states without such programs to adopt their own. At least 27 states have adopted or are considering some form of a secure choice program.
The Labor Department's inconsistent approach is unacceptable.
The new administration, to its credit, is reviewing both rules, adopted last year under the Obama administration. It delayed implementation of the fiduciary rule to June 9, and should examine the freedom it has provided to secure choice plans, and consider bringing them under ERISA.
The DOL's secure choice rule undermines ERISA protections for participants in those plans, which are aimed at the approximately 55 million private-sector employees without access to a retirement saving account.
Perhaps the DOL's focus on developing a fiduciary rule for retirement clients of brokers distracted it from addressing more important challenges for retirement participants, such as easing the transfer of assets to new employer sponsors or individual retirement accounts.
In addition, secure choice programs, designed to extend retirement savings accounts coverage, create unintended consequences that have fiduciary repercussions.
Employers, especially smaller employers, sponsoring qualified retirement programs struggle to meet the costs of complying with ERISA requirements. The administrative costs and complexity, and the unwelcome assumption of responsibilities and liabilities of acting as a fiduciary, often deter smaller employers from sponsoring retirement programs.
The secure choice options being planned by states and cities could tempt employers that offer such plans to dismantle their programs and shift participants to the state- and city-sponsored plans, in which case secure choice would add little to retirement savings. In addition, participants would lose ERISA protections they have enjoyed under employer-sponsored plans.
Secure choice plans also risk becoming captive to political pressures on investment service providers and on matters such as corporate governance and proxy-voting activism.
They also create a patchwork of different regulations state by state. They become a challenge to oversee to make sure participants enjoy protections. They complicate payroll administration for employers operating in different states, confounding the uniformity provided by a single federal law: ERISA. The programs would create complexity for participants who move from state to state to work, as they are forced to switch between different plans, deterring participation.
The Department of Labor should insist secure choice programs include no prohibition against participants transferring their assets to private-sector IRAs offered by investment management firms, which offer a broader array of investment choices, as well as enabling participants to consolidate retirement assets.
Expanding employer-sponsored retirement program coverage to more participants has been a challenge that secure choice plans seek to overcome. If the DOL were serious about that it could have offered private-sector 401(k) plans and IRAs similar safe harbors to those it is granting to secure choice plans.
401(k) plans have become critical to retirement for most participants in private-sector employer-sponsored plans, but their design remains “marooned in the past,” essentially as created in 1981, as Shlomo Benartzi and John Payne co-wrote in a May 27, 2013, Pensions & Investments commentary.
Messrs Benartzi and Payne recommend a safe haven for innovation where improvements in plan design “can be safely hatched and tested in workplaces” and shared with the Department of Labor, academics and other employers.
As a result, successful innovation on a small scale could be rolled out on a broader scale across the country, they wrote. Review committees would oversee experiments to ensure procedures were followed and participants treated properly.
Policymakers should ensure secure choice is no obstacle to encouraging employers to embrace the robust IRA marketplace as an alternative. It also should ensure the DOL does not have one set of rules for secure choice plans and another for private-sector plans, as appears to be the case with the current DOL stance.
This article originally appeared in the March 20, 2017 print issue as, "DOL can't have it both ways".