DOL stance boosts private-sector retirement plan efforts from the states

The concept of states setting up retirement programs for private-sector workers is gaining traction, with help from the Department of Labor and policymakers in an increasing number of states.

Maryland became the latest state on Sept. 15, when legislative leaders announced a retirement security and savings commission that will develop a retirement savings program. New Jersey could be next, with supporters pushing for passage this year of a bill creating voluntary accounts for workers without employer-provided plans.

A turning point came Sept. 3, when the Labor Department drafted proposed rules to guide states as they set up workplace-based retirement programs. While many states once kept a nervous eye on the DOL, those fears eased considerably in July when President Barack Obama promised further guidance by the end of 2015.

DOL officials reinforced their willingness to help states with proposed rules on setting up auto-enrollment individual retirement account savings programs for private-sector employees. The key feature would be contributions via payroll deductions so that employers are not subject to the Employee Retirement Income Security Act.

Approval of the DOL proposal from the Office of Management and Budget also should clarify the timeline for final rules. Next up for DOL officials is separate guidance to help states create retirement plans that would be covered, but not pre-empted, by ERISA. Such guidance could signal a wider opportunity for other defined contribution approaches, such as multiple-employer plans.

Anticipated DOL regulations “will play a vital role in whether or not we will be able to move forward with our program in California,” said Christina Elliott, acting director of the state's Secure Choice program, which plans to automatically enroll workers who don't have a workplace plan into an IRA that is pooled and professionally managed. The statute that created the program “is very clear that if the program is subject to ERISA, then it shall not be implemented. If we cannot mandate participation at some level, and if we cannot auto-enroll participants, we have essentially been stripped of the ability to move the needle on the retirement crisis in California,” said Ms. Elliott.

Before 2015, it was early adopters like California or Illinois that considered or acted on the ideas. This year, that trickle turned into a solid stream, with 25 states considering or passing legislation to create their own state retirement program for private-sector workers, or at least establish a study group to head in that direction.

“The drumbeat is just getting louder and louder,” said Sarah Gill, senior legislative representative for AARP in Washington, which is playing a key role in the states.

“The people who are coming to the table are different. I think this is critical mass when you have half of the states doing something,” said Ms. Gill, who predicts that all states will be working on something in 2016, and even some cities. “All signs point toward "go' at this point,” she said.

Others agreed.

“If (the) DOL does as the president has directed and gives states a clear path to establish new retirement programs, it will open the gates wide open,” said Angela Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University's McCourt School of Public Policy.

Part of the newfound enthusiasm comes from a steady stream of statistics showing how between one-third and one-half of all workers do not access, or have access to, workplace retirement programs. Some of the state ideas call for auto-enrolling participants who don't have access to workplace plans, often with opt-out provisions.

State officials also are paying closer attention to another number: What it will cost states if their residents are not financially prepared for retirement. One study presented to Utah lawmakers in January forecast the state would spend $3.7 billion over the next 15 years as new retirees increasingly turn to government assistance.

Then there are the 10,000 baby boomers turning 65 every day, many of them unprepared financially to retire.

“States are acting out of necessity. There is an economic tsunami on the horizon,” said Ms. Antonelli. That makes it a bipartisan issue, noted AARP's Ms. Gill.

Critics are changing, too, with some once-resistant retirement plan service providers and money managers softening, and even engaging with states, positioning themselves for new markets that, while small at first, are showing promise of growth.

Empower Retirement officials have met with legislators in various states to discuss ways to expand retirement access, including greater tax incentives and reduced administrative or legal burdens, said Empower President Edmund F. Murphy III, Boston, in an e-mail.

“Practical policy changes can address the issues that inhibit small businesses from giving their workers access to employer-sponsored retirement plans. The industry and policymakers can work in partnership to address the access gap in workplace savings plans,” Mr. Murphy said

DOL guidance might have led to a different outcome for Washington state, which in May enacted a law creating a small business retirement marketplace website to match businesses with fewer than 100 employees and existing private-sector retirement plans.

The bill's sponsor, State Sen. Mark Mullet, originally had envisioned a state 401(k) plan with automatic enrollment of workers without coverage, but after strong resistance from the financial services industry, wound up negotiating with Securities Industry and Financial Markets Association officials on a more politically acceptable bill to avoid ERISA pre-emption and liability for employers or the state.

”DOL is making it very clear now that they want states to be able to offer auto enrollment. I think they are acknowledging that auto-enrollment is the way to go when you get into state-sponsored retirement vehicles,” Mr. Mullet said in an interview.

Washington's voluntary program will include the federal myRA program, for which SIFMA continues to advocate, along with the marketplace approach. Marketplaces and myRA “make sense from a portability point (and) for small savers,” said Lisa Bleier, SIFMA's managing director for public policy.

For many financial services firms working with the states, the future means multiple-employer plans.

Unlike multiemployer plans, which are typically collectively bargained and managed, a multiple-employer plan is adopted by two or more unrelated employers. But the concept has not taken off with small and midsize firms whose executives are worried about how the Labor Department views them.

“We are really pleased that the DOL is going to be issuing guidance that will help employers establish MEPs,” said Bennett Kleinberg, vice president for innovation in Prudential Retirement's institutional investment solutions business lines, Hartford, Conn.

“By having MEPs, you are introducing scale and you are making success easier. It's definitely one of the key area of discussions,” said Fredrik Axsater, global head of defined contribution for State Street Global Advisors, San Francisco, which has $2.4 trillion under management, and $363 billion in global defined contribution assets.

Settling the legal status of MEPs isn't enough, though, Mr. Axsater said. “In order for us to really move the dial we need automaticity,” along with plan design choices and institutional quality of investment options, he said.

“Which model a state adopts has been the product of both the policy and politics in that state. Every state is different,” said Ms. Antonelli of CRI. “If DOL's guidance allows for all options to be available to states, you will see even more states jump in and cross the finish line. It will be a game-changer for retirement security in this country.”