The White House is throwing in the towel on its stalled initiative to extend retirement saving accounts to millions of workers who currently aren’t covered by employer plans. Instead, the Obama Administration is turning its attention to helping states close the coverage gap.
That’s one headline that surfaced at the recent White House Conference on Aging. President Obama announced that he has directed the U.S. Department of Labor (DOL) to clear the path for states to create retirement saving systems for employees of that don’t offer 401(k)s. If the rules are finalized before the President leaves office – and that’s a major question – some states will start offering their new retirement plans as early as 2017, and the ball could get rolling in many more states that are considering the idea.
President Obama has been pushing since 2010 for Congress to approve auto-IRAs, a national plan requiring employers with more than 10 employees and no pension coverage to contribute three percent of the worker’s salary into an IRA. That comes in response to falling ownership of retirement plan – just 40 percent of households owned any type of account – IRA, 401(k) or traditional pension – in 2013, down from 48 percent in 2007, according to the Federal Reserve Board’s triennial Survey of Consumer Finances released last September. The Center for Retirement Research at Boston College estimates that at any given point, only half of U.S. private sector workers participate in a retirement plan.
Since Congress has refused to play ball on auto-IRAs, states have been taking matters into their own hands.
California, Illinois, Oregon and Washington state have taken the lead legislating auto-IRA programs of their own. Roughly half of the states are considering the idea, according to AARP. These are state government-sponsored retirement-savings vehicle that would be offered to employees of companies that don’t have their own workplace retirement plans; employees would contribute through payroll deductions to IRA accounts; the plan’s investments would be professionally managed, but no employer contributions would be required.
But there’s been a regulatory sticking point: would the plans be governed by the Employee Retirement Income Security Act (ERISA), the federal law that sets standards for private-sector pension plans? Although IRAs aren’t covered by ERISA, the payroll deduction feature of the plans raised the question. Concerns about regulatory burdens for employers-and their possible fiduciary responsibilities under the plans – led states to include clauses in their enabling legislation stating that the plans wouldn’t proceed if they were deemed to be ERISA plans.
The states argue that fiduciary liability can be taken on by the boards governing the plans, and by third-party financial services companies that are hired to run them. California, the first state to pass auto-IRA legislation, has been waiting for clarification on these issues for nearly three years now.
DOL officials earlier opposed letting the plans proceed without the regulatory protections of ERISA, and the administration preferred to focus on its own national auto-IRA plan. “The DOL has always viewed its job under ERISA as policing employers,” says Joshua Gotbaum, former director of the Pension Benefit Guaranty Corporation, the federally sponsored agency that insures private sector pensions, currently a guest scholar at The Brookings Institution. “So they have resisted moving from policing employers to policing financial service providers. That’s a necessary step in order to get to any Secure Choice plan.”
At the aging conference, the President said that he has directed DOL to propose a set of rules by the end of this year:
. . . we’ve got to make it easier for people to save for retirement. And today, I’m pleased to announce an important step that we’re taking to do just that. Right now, about one-third of American workers do not have access to a retirement plan at work — one-third. That’s why every budget request I’ve submitted since taking office has included a common-sense proposal to automatically enroll workers without access to a workplace retirement plan in an IRA, which would provide an additional 30 million Americans with access to a retirement plan at work.
Now, unfortunately, Congress has repeatedly failed to act on this idea. The good news is states are stepping up -– just like they’re stepping up in other areas where Congress is not doing its work, like raising the minimum wage or making paid sick leave available for working families. (Applause.) So far, a handful of states have passed laws to create new ways for people without a workplace plan to save for retirement. And more than 20 states are thinking about doing the same.
We want to do everything we can to encourage more states to take this step. So I’ve called on the Department of Labor and Tom Perez to propose a set of rules by the end of the year to provide a clear path forward for states to create retirement savings programs. And if every state did this, tens of millions more Americans could save for retirement at work
Questions remain. Regulatory red tape and foot-dragging could mean a failure to finalize rules before the administration leaves office. “We’re being told that this is on a fast track, with a proposed regulation by this fall, and a final regulation by the end of this year – but that seems optimistic,” says Dan Reeves, chief of staff for California state senator Kevin de León, sponsor of the California legislation.
Just as important will be the nature of the new rule. DOL could simply state that a payroll deduction plan isn’t subject to ERISA, or it could go bigger. Reeves is hoping for a regulation that gives states a range of options on how they can proceed without being subject to ERISA. California and Illinois both aim to begin enrolling workers in 2017. Perez comments on the DOL process in this recent blog post.
Says Gotbaum, “What I hope they’ll do is declare that these are multi-employer 401(k) plans, that they can even be defined benefit plans and that the employers won’t be considered fiduciaries just by participating.”
DOL didn’t respond to a request for comment.