The U.S. Department of Labor (DOL) has published a notice of proposed rulemaking and an interpretive bulletin meant to guide states as they create programs to help people without access to retirement plans at work save and invest for their long-term future.
The rulemaking has a particular focus on helping states bring such plans into alignment with the challenging procedures and requirements of the Employee Retirement Income Security Act (ERISA), and also offers potential safe harbor protections for states implementing so-called auto-IRA laws.
As Labor Secretary Thomas Perez explains, many states across the U.S. are seeking ways to bring tax-qualified, automatic workplace retirement investment options to individuals not covered by more traditional defined contribution (DC) or defined benefit (DB) plans sponsored by employers. This has motivated the DOL to assess what the federal government might be able to do to help the states get more people saving at work.
To be clear, Monday’s action from the DOL was two-fold. The Department’s Interpretive Bulletin 2015-02 sets forth its current view concerning the application of ERISA to “certain state laws designed to expand the retirement savings options available to private sector workers through ERISA-covered retirement plans.” The Department separately released a proposed regulation describing safe-harbor conditions it would like to set up for states and employers to avoid creation of ERISA-covered plans as a result of state laws that require private sector employers to implement in their workplaces state-administered payroll deduction individual retirement account (IRA) programs, commonly referred to as auto-IRAs. In other words, the Interpretive Bulletin does not address such state auto-IRA laws directly, but the efforts are intimately related and tied to the ongoing effort to eliminate the retirement plan coverage gap.
Introducing the guidance, Perez noted concern over adverse social and economic consequences of inadequate retirement savings has prompted several states to adopt or consider legislation to address this problem, making it necessary for the DOL to act now in this area.
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Turning first to the proposed new rule, for which written comments are due to the DOL on or before January 19, 2016, the regulator observes several states have already moved to establish payroll deduction savings initiatives in the auto-IRA style. Examples include Oregon, Illinois, and California, which have all adopted laws along these lines.
“These initiatives generally require specified employers that do not offer workplace savings arrangements to deduct amounts from their employees’ paychecks in order that those amounts may be remitted to state-administered IRAs for the employees,” DOL explains. “Typically, with automatic enrollment, the states would require that the employer deduct specified amounts on behalf of the employee, unless the employee affirmatively elects not to participate. As a rule, employees can stop the payroll deductions at any time. The programs, as currently designed, do not require, provide for or permit employers to make matching or other contributions of their own into the employees' accounts.”
In addition, the state initiatives already moving forward generally require that employers act as a conduit for information regarding the IRA program, DOL explains, including disclosure of employees’ rights and various program features, often based on state-prepared materials.
Expanding use and complexity of these programs has prompted state officials and investment industry practitioners to ask what relationship they might have with the requirements of ERISA. Given that Title I of ERISA stipulates that its authority applies to “any employee benefit plan if it is established or maintained ... by any employer engaged in commerce or in any industry or activity affecting commerce,” it seems on first-blush such programs would be covered by ERISA. And indeed, various types of retirement savings programs involving IRAs already fall within the broad definition of an ERISA-covered retirement plan when those programs are established or maintained by a private employer or employee organization.
Despite the tenants of Title I, there remains ambiguity in this area because ERISA coverage is contingent on an employer or employee organization “establishing or maintaining the arrangement.” While it is true that a given state will be closely involved in the creation and operation of an auto-IRA system for the private sector, it is less clear that the state would therefore be subject to the same requirements as an employer would be. Put another way, the state in an auto-IRA scheme does not necessarily fill the same roll as an employer offering a traditional IRA.
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The DOL looks back to a 1975 regulation about a similar subject to explain the intent of its current rulemaking. The 1975 regulation provides that ERISA does not cover a payroll deduction IRA arrangement so long as four conditions are met: the employer makes no contributions; employee participation is completely voluntary; the employer does not endorse the program and acts as a mere facilitator of a relationship between the IRA vendor and employees; and the employer receives no consideration except for its own expenses.
In essence, under the old rulemaking, if the employer merely allows a vendor to provide employees with information about an IRA product and then facilitates payroll deductions for employees who voluntarily initiate action to sign up for the vendor's IRA, the arrangement is not an ERISA pension plan. In 1999, the Department published additional guidance about this safe harbor in the form of Interpretive Bulletin 99-1, which explains that employers may, consistent with the third condition, furnish materials from IRA vendors to employees, answer employee inquiries about the program, and encourage retirement savings through IRAs generally, as long as the employer makes clear to employees its neutrality concerning the program and that its involvement is limited to collecting the deducted amounts and remitting them promptly to the IRA sponsor.
Of particular importance in the current context is the “completely voluntary” component of the 1975 approach, DOL explains. “The Department intended this term to mean considerably more than that employees are free to opt out of participation in the program. Instead, the employee's enrollment must be self-initiated. In various contexts, courts have held that opt-out arrangements are not consistent with a requirement for a ‘completely voluntary’ arrangement.”
Here enters the need for a new safe harbor for states moving to create retirement savings options with this approach, DOL says. “This condition is important because where the employer [i.e. a state government] is acting on his or her own volition to provide the benefit program, the employer’s actions—in requiring an automatic enrollment arrangement—would constitute its ‘establishment’ of a plan within the meaning of ERISA’s text, and trigger ERISA’s protections for the employees whose money is deposited into an IRA. As a result, state payroll deduction savings initiatives with automatic enrollment do not meet the 1975 safe harbor’s ‘completely voluntary’ requirement.”
Perez says the 1975 safe harbor requirements were not written with the current crop of state laws in mind. Therefore, the department is promulgating this new safe harbor that does permit automatic enrollment in such state payroll deduction savings arrangements, so long as opt-out provisions are included and the program is otherwise administered in a compliant manner.
Specifically, the proposed regulation Section 2510.3-2(h) provides that “for purposes of Title I of ERISA, the terms ‘employee pension benefit plan’ and ‘pension plan’ do not include an individual retirement plan (as defined in 26 U.S.C. section 7701(a)(37)) established and maintained pursuant to a state payroll deduction savings program if the program satisfies all of the conditions set forth in paragraphs (h)(1)(i) through (xii) of the proposed regulation. In the Department’s view, compliance with these conditions will assure that the employer's involvement in the state program is limited to the ministerial acts necessary to implement the payroll deduction program as required by state law.”
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The distinct, but related, Interpretive Bulletin 2015-02 is effective November 18, 2015, the DOL says. The publication interprets “ERISA section 3(2)(A), 29 U.S.C. 1002(2)(A), section 3(5), 29 U.S.C. 1002(5), and section 514, 29 U.S.C. 1144, as they apply to state laws designed to expand workers’ access to retirement savings programs.”
DOL says the regulation is meant to eliminate uncertainty about the effect of ERISA’s broad preemption of state laws that “relate to” private sector employee benefit plans. Put simply, DOL says in the interpretive bulletin that ERISA preemption principles leave room for states to sponsor or facilitate ERISA-based retirement savings options for private sector employees, “provided employers participate voluntarily and ERISA’s requirements, liability provisions, and remedies fully apply to the state programs.”
The DOL adds it is “not aware of judicial decisions or other ERISA guidance directly addressing the application of ERISA to state programs that facilitate or sponsor ERISA plans, and, therefore, believes that the states, employers, other plan sponsors, workers, and other stakeholders would benefit from guidance setting forth the general views of the Department on the application of ERISA to these state initiatives.” However, DOL reiterates that the application of ERISA in an individual case “would present novel preemption questions and, if decided by a court, would turn on the particular features of the state-sponsored program at issue. But, as discussed below, the Department believes that neither ERISA section 514 specifically, nor federal preemption generally, are insurmountable obstacles to all state programs that promote retirement saving among private sector workers through the use of ERISA-covered plans.”
The bulletin provides further guidance about what compliant state-run programs may look like. In one approach, the state could establish a marketplace to connect eligible employers with retirement plans available in the private sector market. The marketplace would not itself be an ERISA-covered plan, DOL says, and the arrangements available to employers through the marketplace could include ERISA-covered plans and other non-ERISA savings arrangements. Under another approach, the state would make available a “prototype plan” that individual employers could adopt. Each employer that adopts the prototype would sponsor an ERISA plan for its employees, and the state or a designated third-party could assume responsibility for most administrative and asset management functions of an employer's prototype plan.
Under a third approach, a state would establish a multiple-employer plan or MEP that eligible employers could join rather than establishing their own separate plan. The MEP would be run by the state or a designated third-party, DOL says. The interpretive bulletin explains that, unlike financial institutions that sell retirement plan products to employers, a state can indirectly act in the interest of the employers and sponsor an MEP under ERISA because the state is tied to the contributing employers and their employees by a special representational interest in the health and welfare of its citizens. The state is standing in the shoes of the employers in sponsoring the plan, DOL explains.
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regulations have some providers worried
While the proposed rule to create a safe-harbor for state-run auto-IRA programs is subject to a comment period and potential changes, retirement plan services providers are already voicing strong opposition. They’re also voicing discomfort with the DOL’s seeming interest, solidified by its new interpretive bulletin, in advocating for the creation of a state-run retirement system for private-sector workers.
For example SIFMA, the Securities Industry and Financial Markets Association, strongly believes other approaches would be more effective to address the retirement savings crisis in America than asking resource-strapped and inexperienced state governments to step in when employers aren’t willing to host their own plans. Fairness issues aside, the group says the private sector already offers a variety of effective retirement savings options, including fairly priced 401(k) plans, 403(b) plans, 401(a) plans, 457(b) plans, SIMPLE IRAs, SEP IRAs, and traditional IRAs. Providers have to work hard to bring products to market in accordance with DOL rules, the argument goes, so why should states get a free pass?
Beyond this, SIFMA argues a state-run retirement plan would create conflicts between federal laws governing retirement plans and laws enacted by individual states. Different states would likely have different rules governing operation, accumulation and distributions, which SIFMA believes could result in confusion among employers and employees. SIFMA also has concerns that employees who save in a state plan will not have the same rights and protections that are provided under the federal regime.
The Investment Company Institute (ICI) was also quick to share it's thoughts. In a statement, ICI President and CEO Paul Schott Stevens says his organization is "deeply concerned that the Obama Administration is pursuing policies that could fragment and undermine our nation’s voluntary retirement system for private-sector workers. The contemplated state programs pose serious hazards for employers and workers, who could be forced to turn their savings over to the same state agencies that have created a $1.4 trillion shortfall in public-sector workers’ pensions.”
“We certainly share the goal of extending access to retirement savings plans to more workers," Stevens says. “But to be successful, that access should be provided through national legislation that builds on the current voluntary system, not through a confusing patchwork of state programs, and with the cooperation—not coercion—of employers who best know the demographics and needs of their workers. Rather than turning to state agencies to promote retirement savings coverage, the Administration would better serve retirement savers if it would give the private sector the tools it needs—including some of the same tools that it proposes granting to state governments—to make coverage more available and affordable for small employers.”
The American Retirement Association has also expressed that the guidance gives a competitive advantage to state retirement plan vehicles.