DOL issues final rule on city retirement programs

The Department of Labor today issued final rules governing retirement programs established by large cities and counties, in the most recent effort by the Obama administration to help plug the retirement coverage gap.
The regulation, which will be published Dec. 20 in the Federal Register, is meant to entice municipalities such as cities and counties to set up payroll-deduction individual retirement account programs for workers in the private sector who don’t already have access to a retirement plan through their employer.
The rule, which will be effective 30 days after publication, is similar to one covering state retirement savings programs that the Labor Department finalized in August.
“Increasing access to savings opportunities, improving transparency and reducing conflicts of interest in investment advice are all critically important policy tools that this administration has pursued,” assistant secretary of labor Phyllis Borzi said in a statement. “We hope that today’s rule increasing access to savings opportunities will add to the tools available for working people who want to save for retirement.”
Like the one governing state programs, the most recent rule eases liability risk for municipalities by exempting them from being subject to the Employee Retirement Income Security Act of 1974 if their plans adhere to certain guidelines.
“It’s a safe harbor that’s very similar to the one released for states, but it allows large political subdivisions like cities and counties also to mandate an auto-IRA program for employers in that city or county,” Michael Hadley, partner at Davis & Harman, said.
To be able to set up a qualifying program, a city or county would have to have a population that is equal to or greater than that of the least populous U.S. state. (So, currently, a municipality would need a population greater than that of Wyoming).
Five states — California, Illinois, Oregon, Connecticut and Maryland — have passed legislation to set up automatic-enrollment payroll-deduction IRA programs. They’re mandatory for employers of a certain size to offer to employees if they don’t already offer a workplace retirement plan. (Employees are able to opt out.)
Other states such as New Jersey and Washington have taken a different approach through a voluntary, marketplace program.
Cities such as New York City and Seattle have indicated they’re moving ahead with their own measures.
Opponents of such savings programs say they will create a patchwork of different plans across the U.S. and lead to less investor protection.
To establish an auto-IRA program, a city or county must have already established a retirement plan (pension or defined contribution) for city or county employees, to ensure the municipality is sophisticated enough to implement the program, Mr. Hadley said.