Despite congressional action, plans still moving forward
Congressional resolutions that unraveled safe harbors for states and cities to create retirement programs for private-sector employees accomplished two things: They stiffened those states' resolve to push ahead, and they dramatized the urgency of finding a way to help what AARP estimates to be as many as 55 million workers who lack access to a retirement plan.
“It just seems very hypocritical,” said Illinois Treasurer Michael Frerichs, whose state is working to launch its auto-enrollment, payroll-deducted retirement savings account program by the end of the year. “We intend to move forward.”
A handful of states — California, Connecticut, Illinois, Maryland and Oregon — are developing retirement savings programs for private-sector employers that do not already offer such plans, and another 20 states passed legislation this year to study options or take the next steps, according to the Center for Retirement Initiatives at Georgetown University in Washington.
States eager to get ahead of what they see as a looming retirement crisis were cheered when the Department of Labor last August issued safe harbors for states and later, in December, for large political subdivisions. Worried about pre-emption by federal regulators, states were relieved that such “secure choice” programs would not be covered by the Employee Retirement Income Security Act, which would have made employers, especially the smaller ones targeted by the initiatives, more resistant.
Congress' message for states to stop those efforts came in the form of resolutions — narrowly approved along party lines by the Senate in May and the House in February — rescinding those safe harbors, and followed by a similar resolution for cities and other large political subdivisions already signed by President Donald Trump. Mr. Trump is expected to sign the state version soon.
Opponents of the safe harbors said they fear that giving states freedom to set up programs would impose conflicting and burdensome mandates on private-sector businesses of all sizes and eliminate long-standing federal retirement protections for workers provided under ERISA.
A knock on states' rights?
Proponents of private-sector retirement savings initiatives see other forces at work.
For starters, “it is anti-states' rights,” said Mr. Frerichs, who noted that in the absence of any federal solutions, states will be on the front lines as an aging population starts retiring in record numbers soon and should be free to find solutions for their residents.
“Congress has failed to address the national retirement security crisis in any meaningful way. States embraced their historic roots of being laboratories for social and economic advancement,” said California Treasurer John Chiang.
U.S. Sen. Chris Murphy, D-Conn., whose state is developing a program, chastised his colleagues about that before the Senate vote. “Think about the message you are sending to states. States are innovating to solve a problem that we are not solving. The consequences of what we are about to do are real.”
The battle was also seen as a reminder of how much money influences policy decisions in Washington, as financial services firms and their industry trade groups did a full-court press on Capitol Hill before the respective votes. Even a White House statement after the city resolution signing referenced the groups' concerns, noting secure choice programs “would give a competitive advantage to these public plans.”
Angela M. Antonelli, executive director of the Center for Retirement, sees something else. “The actions of Republicans to try and stop state initiatives that would create more competition, less Washington meddling, more retirement savings for private-sector workers and at no cost to the federal government are a reflection of Washington special interest politics at its worst.”
Secure choice advocates say their target audiences of non-savers is not being served in the marketplace now, and that it would take years to build the economies of scale needed for cost-efficiency and enough assets to attract interest from service providers. “If it slightly rubs the big retirement companies the wrong way, you're going to step in and take that ability away?” chastised Mr. Murphy on the Senate floor.
Sen. Ron Wyden, D-Ore., whose state is launching a pilot phase of its OregonSaves program in July that is widely expected to be the first mover in operation, was equally blunt before the vote: “This legislation puts special interests before working people. It's that simple.”
Cathie Eitelberg, senior vice president and national public-sector market director for Segal Consulting, thinks the financial industry should consider working with, not against, the innovative states. “For them to not see it as an opportunity but as a threat, it's mind-boggling,” said Ms. Eitelberg, who noted that California alone projects as many as 6 million accounts will be created.
David Morse, a partner with K&L Gates law firm in New York who consults with several states on their secure choice initiatives, even sees the well-financed opposition as a good sign. “Folks against it are afraid it's going to work. It's just too huge a need,” Mr. Morse said.
For other states in earlier planning or legislative stages, the recent congressional action could be more of a setback. “I think you might see a lull,” Segal's Ms. Eitelberg said. “They will want to see some plan up and running first,” likely to be Oregon's. “They want to see how the pioneers go,” Mr. Morse agreed.
Invoking ERISA protection provides an opening for proponents of multiple-employer plans with voluntary employer participation, an approach favored by Vermont, and included in a package of retirement incentives sponsored by Senate Finance Committee Chairman Orrin Hatch, R-Utah, who led the Senate vote against the safe harbors.
State officials might also rethink whether to make their programs voluntary or mandatory for employers. The mandatory auto-enrollment IRA programs enacted in five states to date were designed to remove employers from any fiduciary-related decisions and potential liability, but mandates also draw stronger opposition from business and financial services groups.
The question of ERISA protection is widely expected to be raised by opponents in legal challenges.
And current plan sponsors will be on alert for new program rules that could impose burdens on them, including how to be exempted, said Will Hansen, senior vice president for retirement policy with the ERISA Industry Committee in Washington, who contends that Oregon violated ERISA pre-emption principles. “We can educate other states as they develop their programs how infringing on employers who provide a retirement plan only harms the overall retirement system,” he said.
State officials who have already gone through legislative and legal scrutiny say they are ready.
“Oregon's program has been very carefully constructed and includes excellent saver protections,” OregonSaves Executive Director Lisa Massena posted on LinkedIn after the Senate vote. “We are staying the course.”
Officials in the other states at the forefront echo that resolve. “This changes very little,” said Hank Kim, executive director and counsel of the National Conference on Public Employee Retirement Systems. “We lost one tool in our toolbox that we didn't have before. States started down this path before this, and it will continue.”
And despite all the federal-vs.-states drama, there could be a silver lining, said Shai Akabas, director of fiscal policy for the Bipartisan Policy Center in Washington. “The fact they have now effectively opposed the state direction means that there is a hole for those who don't have access. I think that does put the onus on federal policymakers to offer a solution. There is a recognition that something needs to get done.”
This article originally appeared in the May 15, 2017 print issue as, "States to persist with secure choice".