Art by J.CiardielloOn August 25, the Department of Labor (DOL) issued a final regulation to clarify when an automatic individual retirement account (IRA) established through state law and administered by a state would not be covered by the Employee Retirement Income Security Act (ERISA), making it less likely that a court would find the state law to be pre-empted by ERISA.
The DOL’s regulatory effort in this area has already sown the seeds for potential shifts in the retirement system as a whole. Now, many states may proceed with implementation of their automatic IRA statutes. We expect this will signal another shift away from employer-based retirement programs.
Over the past few years, many states have moved to enact legislation intended to expand access to, and coverage under, the U.S. retirement system. To facilitate these initiatives, President Barack Obama directed the DOL to issue guidance to clarify the interaction between the state laws establishing these initiatives and ERISA.
Last November, the DOL issued guidance to address three types of state initiatives: 1) state-run plans, including state-run multiple employer plans (MEPs); 2) state-established marketplaces for retirement plans; and 3) state automatic IRAs.
The DOL’s first piece of guidance, Interpretive Bulletin (IB) 2015-02, addressed state-run plans and state marketplaces. The IB would facilitate both the marketplace and state-run plan approaches in three ways.
First, the IB clarifies the DOL’s position that ERISA would not necessarily pre-empt state laws implementing state-run plans, provided that employers participate voluntarily and ERISA applies to the plan the employer adopts. Second, the IB permits a state to run a MEP. The DOL has consistently said that employers participating in a MEP must have a common nexus, but the IB explains that the state essentially (and inexplicitly) creates a nexus because it has a special representational interest in the health and welfare of its citizens. Third, the IB sets forth the DOL’s views of ERISA Sections 3(2), 3(5) and 514 as they apply to state-run master and prototype plans, state-run MEPs and state-run marketplaces.
Final state automatic IRA regulation. The DOL’s finalized regulation permitting state automatic IRAs affirms that the automatic IRA program must be established pursuant to state law, and that, besides the state itself, a state agency or instrumentality may administer the program. The state or a state agency must select the investments available under the IRAs and must retain full responsibility with respect to the administration of the program.
To be availed of the safe harbor, the DOL required that the role of the employer be limited to forwarding employee contributions, providing notices and program information to employees, and providing information necessary to facilitate the operation and administration of the automatic IRA program. Employers may not make contributions to the program or incent employee participation in any way. Employers will be required to participate in the state program. An employer who voluntarily chooses to participate may be deemed to have established an ERISA plan. Similarly, employees must be provided the right to opt out of participation, and the state must establish a mechanism for the enforcement of employees’ rights under the program.
Proposed regulation for political subdivisions. The DOL also published a proposed regulation to provide that a safe harbor for automatic IRAs run by political subdivisions would apply the same conditions as the final regulation for state automatic IRAs. The only issue still to be addressed is the definition of a “qualified political subdivision.”
The DOL’s final regulation will provide certainty for states considering, designing or implementing state automatic IRAs. Besides the states that have already passed legislation providing for such programs, many more may soon follow.
While these state initiatives have the potential to expand access to workplace retirement plans for many Americans, they also run the risk of subjecting employers to a patchwork of differing regulatory regimes.
As a result, the growing state efforts may ultimately prompt Congress to act. Notably, President Obama has repeatedly proposed creating a federal automatic IRA that would impose a single set of rules across all states.
Efforts such as these will have a long-term detrimental impact on the viability of employer-based retirement plans. This is not good news for those of us who believe in employer-based retirement programs.
Stephen Saxon is a partner with Groom Law Group, Chartered. George Sepsakos, an associate in Groom’s fiduciary responsibility group, contributed to this article.