DOL proposal on state plans raises concerns from providers

Proposed rules from the Department of Labor that give the green light to states to consider creating retirement savings programs for some private-sector workers are raising concerns among service providers, from record keepers to asset managers.

They worry a perceived DOL endorsement would give state plans an unfair advantage and, worse, could lead to lower savings rates for participants.

On Nov. 16, Secretary of Labor Thomas E. Perez announced the rulemaking initiative at a Chicago event with Illinois Treasurer Michael Frerichs, whose state is considered a trailblazer in this area, along with California, Connecticut and Oregon. While a new Illinois law gives the state two years to implement an individual retirement account plan for small companies, “we could not get up and running without this proposed regulation today,” Mr. Frerichs said at the event. “It puts us on a path to move forward.”

DOL officials bundled the proposal with interim guidance aimed at encouraging states to consider other defined contribution programs that would be covered by the Employee Retirement Income Security Act, yet still under state control, such as multiple employer plans and retirement plan marketplaces.

Together, the proposed rules and interim guidance are being seen as a green light to states eager to provide easy ways to attract more retirement savers through the workplace, targeting small employers.

Until now, state officials were concerned their programs would be subject to ERISA. Continued reluctance until the rules are finalized is most likely to mean more states considering a simple, payroll-deduction IRA program that keeps small-business owners away from ERISA.

But as the prospect of more state programs for private-sector workers grows, so does resistance from retirement service providers concerned the DOL could wind up giving states an unfair advantage over private-sector offerings.

A better approach would be streamlining ERISA for all employers, said Barbara Novick, co-vice chairwoman of BlackRock Inc., who worries the DOL's backing of state efforts could create “regulatory arbitrage” that favors state programs over ones subject to ERISA.

The unintended, negative consequence of that could be lower savings rates, if employers switch to simpler, lower-cost state IRA plans without employer matches.

“This proposal creates the risk of public plans crowding out the others. You're basically creating a construct where there is access but less savings,” said Ms. Novick. “There's significant underutilization of retirement plans for small employers. Expense and complexity make it a high hurdle, so we need to solve that problem.”

Brian Graff, CEO of the American Retirement Association in Arlington, Va., sees the DOL efforts as “misplaced attempts” that could create an unfair marketplace for retirement products and services. “We don't like anything that is going to put the state products at an unfair advantage,” he said.

That displeasure already has started rumblings about potential legal challenges once the final rules come out. That threat is something “we've certainly heard from various stakeholders,” Mr. Perez said at the Chicago event, adding a proposed safe harbor for state-run IRA programs would insulate states from potential lawsuits.

That issue will be among many DOL officials expect to address as they sift through issues raised during a 60-day comment period ending Jan. 19.

In the meantime, some states are gearing up. In Maryland, state Sen. James Rosapepe, who has sponsored legislation to create a plan for private-sector workers without access to plans at work, is planning his fourth try when the General Assembly convenes in January, following bipartisan support for a retirement security task force now reviewing plan designs. “I am optimistic that we are going to come up with a proposal,” said Mr. Rosapepe, who is finding some providers and associations willing to work with the task force. “If a state moves forward, there will be more options. It won't take away options. Competition is good.”

And some retirement service providers and asset managers agree. “You will start to see the conversation broaden a little bit,” said Sarah Gill, senior legislative representative for AARP in Washington, which is playing a key role in getting state policymakers to consider and move toward offering retirement savings plans. She said Washington state legislators worked with the Securities Industry and Financial Markets Association to craft a politically acceptable bill creating a marketplace website to make it easier for small employers to start a plan. “The issue of critical mass has really gotten providers to come to the table. I do see them softening,” said Ms. Gill.

Other providers see potential in multiple-employer plans, which will need congressional help to fix a current legal provision that could cause employers to share liability for another participating employer's missteps. “We think that the states will find it helpful to sponsor MEPs,” said Bennett Kleinberg, vice president for innovation in Prudential Retirement's institutional investment solutions business lines, Hartford, Conn. “As more and more states start to think about it, we need to be out talking to states about the benefits. The focus is going to be on the value of ERISA-covered plans, because then the states don't have to build a regulatory framework,” he said. While Mr. Kleinberg said he would prefer a federal solution, “we do see the (DOL) guidance as a positive first step.”

Hank Kim, executive director and counsel of the National Conference on Public Employee Retirement Systems in Washington, also sees more providers “coming around” and recognizing new markets that aren't being served now.

“I don't think the politics is going to get any worse. I'm hoping it's going to get better,” he said. “I think 2016 is going to be a momentous year.”

Diane Oakley, executive director of the National Institute on Retirement Security in Washington, sees it in football terms. With the latest DOL action, “I'd say we got another first and 10 and we're moving toward that goal post. There will be penalties, but I think we're beyond the 50-yard line.”