The Department of Labor on Monday released proposed rules that would allow states to set up mandated payroll deduction IRA programs for private-sector employees, along with interim guidance to encourage states to consider other defined contribution programs.
U.S. Secretary of Labor Thomas E. Perez made the announcement in Chicago at an event with Assistant Secretary of Labor Phyllis Borzi, Illinois state Treasurer Michael Frerichs and John W. Rogers Jr., chairman, CEO and chief investment officer of Ariel Investments.
Some states have been reluctant to implement or advance such plans without knowing whether the programs would be subject to the Employee Retirement Income Security Act. The proposed rules include safe harbors for state automatic individual retirement account programs to avoid ERISA pre-emption.
DOL officials also want to encourage states to create defined contribution retirement plans that would be covered, but not pre-empted, by ERISA, which the DOL regulates, such as multiple employer plans and retirement plan marketplaces.
Mr. Perez said Monday that the proposed rules would be posted shortly on the Federal Register for the 60-day comment period.
Millions of people in the U.S. have no access to employer-sponsored retirement plans, and “many states are stepping in to fill that leadership void,” Mr. Perez said. He cited recent legislation in Illinois, California and Oregon that established secure choice retirement plans in those states, and said another 20 states are exploring such legislation.
Mr. Perez said the DOL's announcement addresses some concerns state officials have had about establishing these programs.
“We've certainly heard from various stakeholders that there's a concern that someone who opposes this approach … would identify litigation approaches to invalidate the program,” Mr. Perez said, “and one such approach potentially could be to file a lawsuit claiming the state lacked the authority or was pre-empted by ERISA from doing that.”
“We think that's incorrect and we think we can clarify through today's regulation, for instance, that the approach that states like Illinois, California and Oregon are taking — with the safe harbor proposal that we have — is consistent with ERISA,” he added.
Mr. Frerichs said Illinois' program took effect in June, and while the law gives the state two years to implement it, “we could not get up and running without this proposed regulation today. It puts us on a path to move forward.”
“This is a big deal because it puts the federal government in favor of expanding coverage to the 70 million people that don't have anything at all,” said Joshua Gotbaum, a guest scholar in economic studies at the Brookings Institution who serves on Maryland's retirement security task force. “Whichever way a state goes, this will help,” Mr. Gotbaum said in an interview.
Brian Graff, CEO of the American Retirement Association, said in a news release: “Both pieces of guidance are misplaced attempts by the administration to promote coverage by giving marketplace advantages to states as retirement plan providers, with no reasonably apparent policy justification to suggest states are somehow going to do a better job providing retirement plan products.”
The Investment Company Institute also condemned the proposed rule. “The contemplated state programs pose serious hazards for employers and workers, who could be forced to turn their savings over to the same state agencies that have created a $1.4 trillion shortfall in public-sector workers' pensions,” said Paul Schott Stevens, president and CEO, in a news release from the group.
Legislation proposed by President Barack Obama to create automatic IRA programs has not been taken up in Congress. “Now, the president is using his executive authority to do what he can to achieve the same goal, expanding access to the private retirement system, without Congress,” said attorney Michael Kreps, a principal with Groom Law Group in Washington and former top aide on the Senate Committee on Health, Education, Labor and Pensions. “The president is essentially green-lighting state retirement initiatives, some of which have the potential to have a major impact on the retirement system,” said Groom attorney David Levine.