The Department of Labor released a final regulation Thursday that will make it easier for states to establish their own workplace retirement savings programs.
Introduced last November, the rule clarifies that state plans would not be subject to the federal Employee Retirement Income Security Act and could not be pre-empted by the statute as long as they met certain conditions. This move eases liability risks.
Eight states — California, Connecticut, Illinois, Maryland, New Jersey, Oregon, Massachusetts and Washington — have approved legislation that establishes state-run retirement plans. Many of them require businesses that don't offer retirement programs to automatically enroll their workers in an individual retirement account overseen by the state.
The final DOL rule came out as California is poised to pass enabling legislation that sets up its plan.
The Obama administration hopes that the regulation will encourage more states to pass their own retirement programs in order to cover the approximately one-third of workers who don't have access to a workplace plan.
“Today's rule will pave the way for states to create and implement innovative new ways for workers to save,” Labor Secretary Thomas Perez said on a conference call with reporters Thursday.
The state plans will not run afoul of ERISA as long as they are established and administered by the state, require minimal participation by employers and are voluntary for employees. Employers do not have to contribute funds to the plans but do have to set up automatic deductions in their payroll systems.
The Financial Services Institute warned of “unintended consequences” of the DOL rule.
“The financial services industry already provides numerous, reasonably priced retirement savings options for Main Street Americans, including IRAs which are readily accessible,” David Bellaire, FSI executive vice president and general counsel, said in a statement. “We are also concerned that some employers may choose to drop strong existing plans in order to reduce their costs. This would be harmful to impacted workers because state-run plans do not provide for the matching funds that are common in employer-based plans.”
Mr. Perez shot back at the assertion that state plans would crowd financial advisers out of the retirement plan market.
“I find that criticism to be patently laughable. These people who figure out a reason to say 'no' have no alternative,” Mr. Perez said, referring to groups that oppose state-run plans.
But one expert countered that allowing state-run plans to operate outside ERISA while making private plans meet ERISA requirements tilts the playing field toward the states.
“They effectively push private providers out of the marketplace, and we don't think that's a good outcome,” said Judy Miller, director of retirement policy at the American Retirement Association. “There are providers that are geared up to [offer plans] on a very cost-effective basis. Subjecting them to ERISA makes it too expensive.”
The DOL also proposed a rule Thursday that would allow cities that are at least as big as the smallest state — Wyoming — to establish their own retirement programs for non-covered workers.
“These are two important steps to putting a secure and dignified retirement within the reach of tens of millions of Americans,” Mr. Perez said.
The administration moved ahead with the rule to catalyze activity at the state level because Republicans in Congress have ignored a provision in President Barack Obama's annual budget proposal that would establish a federal-level automatic IRA, according to Mr. Perez.
Republicans have resisted auto-IRA legislation because they assert that it is a mandate on small businesses.
“The Republicans don't seem to be on the side of ordinary Americans trying to save for retirement,” Mr. Perez said.