Industry Voices

Barry’s Pickings Online: Untangling the State Auto-IRA/ERISA Mess

Michael Barry, president of the Plan Advisory Services Group, discusses what may be confusion among lawmakers about state-run plans for private-sector workers.

By PS | July 05, 2017
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PS-Portrait-Article-Barry-JCiardiello.jpgArt by J.CiardielloThe Department of Labor (DOL)’s position is that “If the employer automatically enrolls employees in a benefit program, the employees’ participation would not be ‘completely voluntary’ and the employer’s actions would constitute the ‘establishment’ of a pension plan, within the meaning of ERISA section 3(2).”

That—in my humble opinion—is a bad rule. Indeed, DOL’s prejudice against negative elections (aka “nudge”) was, for some employers and for a time, an element that held back a number of positive innovations—including automatic enrollment, automatic escalation and qualified default investment alternative (QDIA) defaults. In all those areas we needed regulations or, in some cases, legislation to get improvements adopted.

That position—that automatic enrollment triggers Employee Retirement Income Security Act (ERISA) coverage of an individual retirement account (IRA)—was the biggest ERISA concern of states considering implementation of mandatory auto-IRA programs. Can we get this point straight: the problem was not that the states were imposing a requirement on employers that they maintain IRA programs for their employees, it was that the IRA programs being proposed involved auto-enrollment. That was the reason that the Obama DOL adopted its 2016 regulation on this issue. That regulation said that states (because they are more “special” than private-sector actors) can impose an auto-enrollment IRA program on private employers and their employees without triggering ERISA coverage—thereby providing a “path forward” for state auto-IRA proposals.

In May of this year, Congress, in Congressional Review Act (CRA) legislation, vetoed that regulation. All that CRA action means is, if DOL’s negative view of auto-enrollment is good law, then states can’t impose an auto-IRA on private employers. But states can still impose a non-auto-enrollment IRA program on them, along with all sorts of obligations with respect to such a program—distributing IRA literature, signing up employees, and implementing payroll withholding. Right now, Oregon is going forward with just such a program—having tinkered with its auto-enrollment language to get around the ERISA problem.

I think, if we took a step back, we in the private sector would be delighted if the DOL ruled that an employer could adopt an auto-IRA without triggering ERISA coverage. That sounds like a neat idea. And, indeed, there are a lot of private providers that would love to offer just such a product. But the DOL says employers can’t do that (without turning the IRA into an ERISA plan, with all the administrative and fiduciary burdens attached). The CRA has no effect on that.

And many in the private sector would be delighted if someone—Congress? The Trump DOL?—said that states couldn’t mandate that a private employer maintain an IRA program. But nobody is saying that, and the CRA has no effect on that.

So private-sector opponents of these state mandates find themselves in the awkward position of arguing that the automatic enrollment feature of these proposals is a bad thing. Which it obviously isn’t. And the states are fussing with language to try and implement something that walks and talks like automatic enrollment, but technically isn’t.

NEXT: The ‘mandate’ versus ‘access’ debate