State private retirement programs get help from president

Private-sector retirement solutions programs at the state level are getting a boost from the White House.

The Labor Department is in line to receive $6.5 million from President Barack Obama's fiscal year 2016 proposed budget to support several two-year pilot programs for states to experiment with ways to expand private sector retirement options. Those include 401(k) plans and individual retirement accounts, particularly for people whose employers do not offer them now.

The proposal would also let Labor Department officials issue a waiver to ensure that a state program would not be pre-empted by the Employee Retirement Income Security Act. Without that waiver, the fear is that a state's program could trigger fiduciary burdens and other liabilities that courts might enforce.

The potential for legal conflict is a top concern for Phyllis Borzi, assistant secretary of labor for the Employee Benefits Security Administration, where officials are now considering offering regulatory guidance as well.

Inclusion of the pilot program in the $4 trillion federal budget proposal — released Feb. 2 and now awaiting congressional action — is raising the hopes of retirement security advocates pushing states to take the lead.

“We are encouraged by this signal that the administration values efforts to expand retirement savings opportunities in the states, and is identifying appropriate avenues to support those efforts,” said Cristina Martin-Firvida, AARP director of financial security and consumer affairs in Washington.

“I think this is a positive sign, and I think there's going to be activity,” said Karen Friedman, executive vice president and policy director at the Pension Rights Center in Washington.

It was also welcome news to policymakers in states like Oregon, where Treasurer Ted Wheeler and others are hoping for passage of legislation implementing recommendations from a retirement security task force.

The task force is calling for a defined contribution plan with automatic enrollment and auto escalation, no required employer contribution and pooled professional investment management.

Oregon and other states considering new retirement plan options are proceeding cautiously to avoid triggering potential conflicts with ERISA, which could leave taxpayers or even employers vulnerable to litigation.

The flip side of avoiding ERISA is that states have to build their own protections for participants.

“A lot of states have wrestled, will wrestle with the ERISA issue,” said Michael Cox, a spokesman for Mr. Wheeler.

“The fact they want to set aside some money for this is a good thing.”

As at least 20 states consider similar approaches but worry whether ERISA will apply, “that question is out there,” said Eric Keener, partner and chief actuary with Aon Hewitt in Norwalk, Conn. He sees the White House proposal advancing the cause for several reasons. “It could matter from the standpoint of whether an employer wants to maintain a plan, or the state might be concerned about fiduciary liability for taxpayers. From the employers' perspective, if it is not (covered by) ERISA, that would be a positive. It's somewhat of a balancing act,” said Mr. Keener.

“Generally the hope is that you can design it so that it doesn't fall under ERISA,” said Christian Weller, a senior fellow at the Center for American Progress in Washington and a professor of public policy at the University of Massachusetts, Boston. “The big stumbling blocks have been pooled investment and auto features.”

He noted that while Congress would have to approve specific waivers for state plans, the federal budget mention “is more of a messaging tool to say, we want this policy space to be filled out. They deserve a look and some experimentation.” Another message, he said, “is there is nothing happening at the federal level.”

States are not waiting. The latest proposal came from Kentucky, in legislation introduced Feb. 3that would create a privately run retirement savings plan for residents who cannot access a plan at work. With a nod to the Treasury Department's “myRA” retirement savings program now being rolled out in phases, the proposed Kentucky retirement account, dubbed KYRA, is being promoted as a way to provide better retirement security without risks to employers or taxpayers.

The first full-scale test case of Washington's new attitude is likely to be in Illinois, where Pat Quinn signed the Illinois Secure Choice Savings Program Act in January, right before he left office. The Illinois act requires Labor Department officials to weigh in on an ERISA exemption.

Illinois' program features auto enrollment and payroll deductions for private-sector employees whose employers do not offer retirement plans outside of Social Security and have at least 25 employees. These plans will take contributions only from employees, who will be automatically enrolled at 3% on June 1, 2017, unless they opt out.

“It's good for the states to experiment with this,” said David Morse, an ERISA attorney with K&L Gates in New York. Mr. Morse is now helping the California Secure Choice Retirement Savings Investment Board, Sacramento, design an ERISA-friendly program. The 2012 Californiastatute enacting the program “says it has to be non-ERISA, but we don't know what that means. It's not clear what is pre-empted or not pre-empted.”

Support and clarification from the Department of Labor would be welcome, he said. “The states are the ones taking the lead. The (federal)government should either get out of the way or help,” said Mr. Morse.

Diane Oakley, executive director of the National Institute on Retirement Security in Washington, also sees it as a “really good signal,” but worries that trying to circumvent ERISA could lead to court challenges. Still, she says, “I think ultimately we could find a way.”

As states figure out how to design plans with successful investment options for participants, the private sector can also help spur competitive solutions, said Josh Cohen, a Chicago-based managing director and head of institutional defined contribution business for Russell Investments. “I think there will be more activity. There's a real recognition of a need to provide more coverage. It starts with small plans, but it has the potential to evolve to how plans are provided today and maybe in the future.”