Trump administration wants to kill California's auto-IRA program

The administration argued in a court filing that auto-IRAs are pre-empted by federal retirement law

Sep 18, 2019 @ 5:08 pm

By Greg Iacurci

The Trump administration is trying to upend California's auto-IRA program, CalSavers, with the intent of halting an initiative among other states that would force employers to offer employees workplace retirement savings plans.

The U.S. Department of Justice filed a "statement of interest" in a lawsuit against California's program, requesting that a judge deny the state's motion to dismiss the lawsuit, Howard Jarvis Taxpayers Association et al v. California Secure Choice Retirement Savings Program et al.

The CalSavers program, according to the DOJ, is pre-empted by the Employee Retirement Income Security Act of 1974. Pre-emption means that ERISA, a federal law, would overrule any state law inconsistent with it.

"It is definitely a significant development," said Michael Hadley, a partner at law firm Davis & Harman, which lobbies on behalf of financial institutions. "This is the first time the Trump administration has expressed a view on these state run auto-IRAs. At least in this filing, they've expressed a view that the programs are pre-empted by ERISA."

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The CalSavers program, which began enrolling employees in July, mandates that private-sector employers of a certain size offer employees a workplace retirement savings option, whether a 401(k)-type plan or a state-created option known as an automatic-enrollment, payroll-deduction IRA, or auto-IRA.

The Department of Justice calls this a "heads-I-win-tails-you-lose" state regulation that exposes employers to "two stark options," according to its filing, made Sept. 13 in the U.S. District Court for the Eastern District of California.

If a federal judge were to side with the Department of Justice's argument, the mandate to offer a retirement program would likely disappear, essentially making the program voluntary for employers, Mr. Hadley said. The voluntary program would also likely be subject to ERISA, he said. That would subject employers to a higher level of care than under CalSavers, for which employers only need to facilitate payroll deduction and aren't held to a fiduciary duty.

While it's unclear how likely that outcome is, such a ruling would effectively undercut the purpose of California's auto-IRA. California and other states such as Oregon, Connecticut, New Jersey, Illinois, Maryland are in various phases of rolling out their own auto-IRA programs, the goal of which is to boost retirement-plan coverage. Advocates claim a mandate, rather than voluntary participation, is the most effective way to boost coverage.

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California expects its program to reach more than 7 million employees who are currently without access to a retirement plan at work. Its program has $660,000 in assets and 2,150 funded accounts. It is sending out its first round of employer notifications in October, which officials expect will increase participation considerably.

Oregon began enrolling employees into its program, OregonSaves, last year. More than 48,000 employees are contributing to the plan, which has roughly $25.5 million, at an average savings rate of 5.3%, according to the state Treasurer's office.

The Department of Justice suggested in its recent court filing that it has its eyes on other state programs, too.

"The United States has a heightened interest in finding the Secure Choice Act pre-empted because the Act is among the first of a number of similar state auto-individual retirement account (IRA) laws to be challenged," the DOJ said.

A judge had dismissed the California lawsuit in March 2019. However, plaintiffs filed an amended complaint in April, on which the court has yet to issue a ruling. The original lawsuit was filed in May 2018.

"We stand by our arguments and remain confident in the court's prior ruling in favor of CalSavers," according to Katie Selenski, executive director of the California Secure choice Retirement Savings Investment Board.

The DOJ's position seems counter to an executive order President Donald J. Trump issued in August 2018 that said "enhancing workplace retirement plan coverage is critical to ensuring" American workers have adequate retirement savings. His administration has since sought to expand use of multiple employer plans, a voluntary 401(k)-type arrangement, among small employers.

Mr. Trump signed legislation in May 2017 to kill an Obama-era rule that would have provided a safe harbor for states that implemented an auto-IRA program.

The administration has also recently moved to revoke California's authority to set auto emissions rules that are stricter than federal standards.

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