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Labor Department finalizes rules for state-run private-sector retirement programs

The Department of Labor issued final rules Thursday that clear the way for states to set up payroll deduction IRA accounts for private-sector workers who do not have access to workplace retirement savings programs. DOL officials also proposed a rule that would allow many other governmental entities to offer their own programs.

The final rules, by clarifying that such programs would not be covered by ERISA, remove the hesitation that some states have expressed about being pre-empted by federal regulators. So far, eight states — California, Connecticut, Illinois, Maryland, New Jersey, Oregon, Massachusetts, and Washington — have passed laws to create state-administered retirement savings programs for private-sector workers. “It just gives a big boost to state activity overall,” said John Scott, director of Pew Charitable Trusts’ retirement savings project, in an interview.

Mr. Scott noted that California legislators, who have been waiting for the Labor Department to address the pre-emption issue, were expected to vote Thursday on implementing their own retirement savings program for the private sector, which could go into effect in January. “I think that’s really a one-two punch in terms of encouraging states to move forward. There will be a renewed impetus,” he said.

The California Assembly passed the legislation Thursday. The bill now heads to the state Senate, where it is expected to be passed and sent to the governor next week.

The final rule for states requires that their programs must be established and administered by the state, have a limited role for employers and be voluntary for employees. Programs that require automatic enrollment would have to include the option to opt out.

The proposed rule for cities and counties offering their own programs, which was developed in response to public comments, could potentially apply to many more workers in states that do not have their own programs. Cities and counties can only offer a program if one is not offered in the state. As proposed, a city could create a program if state law allows it and if the population is equal to or greater than the population of the least populous state. According to the 2013 Census, Wyoming is the least populous, with 582,658 residents.

The final rules and proposed rules will be published in the Federal Register shortly. There is a 30-day comment period for the proposed rules.