Secure Choice prospects tested by House vote

States and local governments hit a major roadblock Feb. 15, when the U.S. House of Representatives approved resolutions blocking Department of Labor safe-harbor rules for their private-sector retirement savings programs.

The move might chill those efforts for some, but others vow to persevere.

“We will regroup,” said Joe Torsella, Pennsylvania's new state treasurer who campaigned on creating an automatic IRA program for private-sector employees without retirement plan access. Mr. Torsella expects last year's bipartisan legislation to reappear in the current legislative session. ”While there are (fewer) options open to us, it's not that there are no options.”

More than 30 states have considered “Secure Choice” state legislation to create programs for private-sector employees without access to an employer-sponsored retirement plan, and eight have programs in development. Washington and Oregon's programs are expected to launch this year, followed by California, Connecticut, Illinois, Maryland and New Jersey. Massachusetts has a smaller pilot program for non-profits.

Their caution about developing programs that could be pre-empted by regulators eased considerably when the Department of Labor issued the safe-harbor rules last year.

Many states and municipalities plan to use individual retirement accounts controlled by participants, not employers, whose only role would be accommodating payroll deductions. Others are considering multiple-employer plans that would be covered by ERISA or retirement provider marketplaces that match small employers with existing service providers.

Employers already sponsoring retirement plans are watching the drama closely as states design their programs, including how existing plan sponsors would be exempt.

“The rules could hurt retirement savings and participants by discouraging plan sponsorship and limiting protections for workers,” Lynn Dudley, American Benefits Council senior vice president for global retirement and compensation policy, wrote to House Speaker Paul Ryan, R-Wis.

“We want to make sure that no state goes down the path of harming the retirement system,” said Will Hansen, senior vice president of retirement policy for the ERISA Industry Committee, whose members worry about rules between states and conflicts with industry practices.

That concern became real in Oregon, an early adopter set to launch a pilot auto-IRA in July. OregonSaves program officials are now reconsidering a proposal that would have required existing plan sponsors to enroll new hires within 90 days. “Our goal is to try to align the program with the way people already do business and with existing standards,” Oregon officials said in an email message welcoming public comments.

To stop the safe-harbor rules, the House used the Congressional Review Act, which allows Congress to prevent a federal agency from implementing recent rules or issuing substantially similar ones without congressional authorization. The rules came out Aug. 25 for states and Dec. 19 for cities and other large political subdivisions.

Taking away the safe harbors “could deprive 6.8 million California private-sector workers the opportunity to save their own money for retirement through a workplace payroll contribution ... at no cost to taxpayers and minimal cost to employers,” said California Treasurer John Chiang in a statement. “Secure Choice, hailed as the greatest achievement in retirement security since the passage of Social Security in 1935, now faces great legal and economic uncertainty.”

The action now shifts to the U.S. Senate, where proponents are pressing their case to be allowed to develop retirement savings programs at the local level in the face of federal inaction, and to protect their constitutional rights to take such actions. No Senate action has been scheduled.

“Our hope is that they allow states to be laboratories of democracy,” said Illinois Treasurer Michael Frerichs, whose state is working to have its auto-enrollment, payroll-deducted retirement savings account program ready for enrollment by the end of the year. Mr. Frerichs, who manages $25 billion as the state's chief investment officer, is undeterred by the House action, which he cautions could cause bigger problems for small-business employers.

“I specifically lobbied so employers would have protection from ERISA lawsuits because they are not making the decisions. We don't think employers should bear any legal burden. This is a conservative principle,” said Mr. Frerichs, one of 15 bipartisan state treasury officials who wrote letters to Congress, along with counterparts in New York City, Philadelphia and Seattle, to oppose the legislation.

“If (the safe harbor) is repealed, it will have a chilling effect on states and cities considering these programs and it will make it harder for the current programs to be implemented,” said Angela M. Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University in Washington. “With 10 states already proposing legislation in 2017, it would be unfortunate if Congress acts to slow such momentum,” Ms. Antonelli said.

State legislatures now considering programs include Hawaii, Iowa, Nebraska, Utah and Virginia.

“Policymakers across party lines have understood that this is about helping people save now so they can be more independent and less reliant on taxpayer-funded programs, such as Medicaid, in their retirement,” Ms. Antonelli added.

A study by Segal Consulting estimates that if all states had private-sector programs they would save $5 billion in Medicaid spending over 10 years. A new National Institute on Retirement Security public opinion survey found growing bipartisan public support for state initiatives, up to 75% from 71% in 2015.

Armed with data and their resolve to improve retirement outcomes locally, state and city officials are fighting back. “This is one skirmish in a much longer war (over) national and local policy on retirement,” said Philadelphia City Controller Alan Butkovitz. “The groups that are opposing (programs) see that this is going to become a larger and larger problem” as aging, unprepared populations grow, and demand on local governments increases, Mr. Butkovitz said.

Plan service providers would have business opportunities in the new programs, Ms. Antonelli said. “States want to work with them to make it easier for them to serve these populations they are not reaching now, or have not found profitable to serve for 40 years.”

Lisa Bleier, managing director for public policy with the Securities Industry and Financial Markets Association in Washington, is hopeful that states will see this is an opportunity to work more closely with the federal government on the Treasury Department's MyRA program, or consider the marketplace approach.

“I think states are going to have to rethink how they do it. We definitely have concerns, and we will continue to raise those concerns,” Ms. Bleier said. “We do not think it is a market challenge. We see it as more of an education challenge.”

Joshua Gotbaum, a guest scholar in economic studies at the Brookings Institution in Washington and chairman of Maryland's small-business retirement savings program, sees the DOL's safe harbor as a conservative interpretation of what ERISA permits, intended to reassure states. Removing the safe harbors “can't and won't change the law. States and cities can and should do what they are already doing. DOL always said that interpreting the law is the job of the courts,” he said.

“The kinds of plans that are being developed are, to one degree or another, no-brainers,” said Mr. Torsella, the Pennsylvania treasurer. “I don't think any of us are going to give up on finding ways to help Americans save for their retirement, unless Congress has better ideas.”