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

Art 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.

I find the rhetoric on this issue hopelessly confused. Republicans have, since 2009 (when the Obama Administration first proposed it), adamantly opposed a federal auto-IRA because it’s a mandate. Republicans, especially after passage of the Affordable Care Act (ACA), hate all mandates. But the mandate here is simply that employers provide a payroll facility—enrollment in a payroll deduction IRA. Employers are targeted by these programs not because auto-IRA proponents hate or want to burden them but simply because payroll seems like the most obvious place to implement an auto-enrollment retirement savings feature.

Unlike the ACA, which mandated that individuals buy insurance, these auto-enrollment IRAs programs (federal or state) do not mandate that individuals save for retirement. They just nudge them—and that is an entirely different thing.

Democrats, on the other hand, go on and on about how 40 or 60 or 80 million American workers don’t have access to a retirement savings program. Well, if all you really care about is “access,” then the states wanting to impose such programs on employers will have no problem. Any state that wants to can set up a mandatory private-sector IRA program, giving every employee of every employer in the state “access” to an IRA. Just as long as it doesn’t provide for automatic enrollment.

Democrats are in love with this word “access,” invoking it to imply that some fair and good policy is being unfairly obstructed. Need for “access” has been hurled at us to justify, for instance, (real) mandates, and (expensive and problematic) subsidies. None of which is going on here. Thus it would help if, with respect to all auto-IRA proposals, the Democrats dropped this talking point. Personally, whenever I hear the word “access” I grab my wallet.

Auto-IRA has never been about access. It has been about getting employees covered by a system in which they can be nudged into saving, based on the premise—which in the qualified-plan world pretty much everyone agrees with—that individuals hyperbolically discount the future and therefore underestimate future retirement needs. This is why we have mandatory Social Security, and why most employers have adopted auto-enrollment for their 401(k)s. Because, left to their own devices—depending only on (as the DOL would have it) “completely voluntary” decisions requiring positive action—most individuals are going to under-save.

Does anyone disagree with this? People need to be coaxed into saving. And a nudge—defaulting them into saving while giving them an opportunity, if they want, to affirmatively elect not to save—coaxes them without compromising their fundamental freedom to choose.

None of that is in the least clear in this debate. If it were, we might at least have a rational conversation about the issue.

Michael Barry is president of the Plan Advisory Services Group, a consulting group that helps financial services­ corporations with the regulatory issues facing their plan sponsor clients. He has 40 years’ experience in the benefits field, in law and consulting firms, and blogs regularly http://moneyvstime.com/ about retirement plan and policy issues.