State Retirement Plans (2 of 3) The Stick — DOL Guidance and State-Based IRA Programs
Summary. This is Part 2 of a 3-part series on state retirement plan legislation. Part 1 was an Overview. Here we focus on recent guidance issued by the Department of Labor that makes it easier for states to take a prescriptive approach to retirement policy by mandating auto-enroll IRAs for employees without access to an employer’s retirement program. This isn’t an urgent topic for employers, but it’s one worth following.
ERISA Preemption. First we have a refresher on ERISA preemption because it figures large in this discussion. (Here’s a link to ERISA section 514 on the amazing Cornell Legal Information Institute site.) ERISA preemption is a good thing, at least we think it is. It gives us a uniform set of laws that apply to employer-sponsored benefits. That makes it easier for companies to sponsor benefit plans for employees around the country. ERISA preemption also clears the way for vendors (think Vanguard, Fidelity, etc.) to offer high-quality products to employers around the country.
ERISA preemption clears away state laws that have an impact on ERISA pension plans and have the potential to disrupt all this uniformity.
Some would argue that state-created retirement programs are ERISA pension plans that are preempted by ERISA.
Not so fast. Taking a cue from the President (2015 White House Conference on Aging), the Department of Labor has issued two sets of guidance clearing the way for states to be players in the retirement policy space by concluding that various state-based programs are not ERISA plans and not preempted by ERISA. (Proposed Regulation) (Interpretive Bulletin) (Fact Sheet)
Proposed Regulation. The first set of guidance comes in the form of a proposed regulation. The regulation is what should catch the attention of employers and their governmental relations experts. That’s because the DOL is giving a green light to the form of state retirement plan legislation most likely to cause problems for employers, maybe even employers that already sponsor a retirement plan.
Under the proposed regulation states can establish retirement programs requiring employers to collect payroll deductions and remit them to a “state payroll deduction savings program.” The state program consists of individual IRAs managed, more or less, by the state. Here are a few more details:
- The program can be an “opt-out” style, meaning all employees eligible for the state program must be automatically enrolled by employers.
- Enrolled employees have the right to stop payroll deductions at any time.
- This means that employers also need to be prepared to administer a process that allows employees to opt out or discontinue participation in the program.
The regulation also allows state programs to require employers to:
- Provide notices to employees,
- Maintain records regarding employer collection and remittance of payments to the program,
- Provide information to the state (such as employee census information),
- Distribute program information from the state to employees,
- Conduct periodic reviews to ensure compliance with the state program rules.
The proposed regulation is a safe harbor. The DOL clearly leaves the door open for more state experimentation. Any employer subject to these rules is in for some (maybe a lot) more paperwork and administration. That may be a necessary step in the direction of a real retirement policy.
Here’s what worries us. The state plans have potential to scoop in employees who work for an employer that already sponsors a plan. The employee may not be covered by the plan because they are in a waiting period or because of some other good reason. An employer who has already established a plan might end up needing to comply with ERISA (for its own plan) and state law (for the state savings arrangement).
Our concern is that if the states move quickly, they will create plans that apply to any employee who isn’t currently eligible for an employer-sponsored retirement plan. With common-sense design and rulemaking this shouldn’t be a problem. But we have some experience with scenarios like this and common sense doesn’t always prevail.
Advice. Employers with big multistate workforces would be well-served to monitor legislation in states like Illinois, California and Oregon to ensure appropriate legislation and administrative rulemaking. In addition to the Pension Rights Center tracker we linked to in Part 1 (pensionrights.org), you might also look to Georgetown Center for Retirement Initiatives (cri.georgtown.edu)
We said this was a 3-part series. We were wrong. The next Part (we’ll call it 2.5) will touch on the other DOL guidance. It’s an Interpretive Bulletin clearing the way for carrots rather than sticks – state proposals aimed at making it easier for employers to sponsor a retirement plan.