DOL Gives State-Run Plans an Edge Over Private Sector
The Department of Labor (DOL) on Nov. 16 unveiled a proposed rule
to clarify ERISA's application to state-run IRA programs, creating an unfair advantage for those programs over those offered by the private sector.
The proposal includes a rule modifying the payroll deduction safe harbor to allow for an ERISA exemption for auto-enroll payroll deduction IRAs offered by states as a default program where there is a requirement for an employer to have a plan.
Following are highlights of the proposal
State Law and Role of the State.
The principal conditions of the proposed safe harbor focus on the role of the state. The state program must be established and administered by a state pursuant to state law. The state must be responsible for investing the employee savings or for selecting investment alternatives from which employees may choose. The state must be responsible for the security of payroll deductions and employee savings. The state also must adopt measures to ensure that employees are notified of their rights under the program, and create a mechanism for enforcement of those rights. The state may administer its program or contract with private-sector providers to administer the state program.
Other conditions of the proposed safe harbor focus on the role and rights of employees. For example, participation in the program must be voluntary for employees. Thus, if the program requires automatic enrollment, employees must be given appropriate notice and have the right to opt out. Moreover, since employees own their IRAs, they must have the ability to withdraw their money under normal IRA rules without any other cost or penalties.
Limited Role of Employer.
Under the proposal, the employer’s activities must be limited to:
- Ministerial activities such as collecting payroll deductions and remitting them to the program;
- providing program information to employees; maintaining records of payroll deductions and remittance of payments; and
- providing information to the state necessary to the operation of the program.
The employer may have no discretionary authority or control over the employees’ IRAs or the operation of the IRA program. Employers cannot contribute employer funds to the IRAs.
Public Notice and Comment.
Comments on the proposed regulation will be accepted for 60 days. Comments can be submitted electronically by email to e-ORI@dol.gov or by using the Federal eRulemaking portal at http://www.regulations.gov
. All comments will be available to the public, without charge, online at http://www.regulations.gov
and www.dol.gov/ebsa, and at the EBSA Public Disclosure Room.
In addition, sub-regulatory guidance in the form of an interpretive bulletin
, effective immediately, allows states to sponsor retirement multiple employer plans (MEPs) for employers operating in the state. This would stand in sharp contrast to the DOL’s long-standing reluctance to enthusiastically embrace the use of these so-called “open” MEPs for otherwise unrelated employer retirement plans.
“Both pieces of guidance are misplaced attempts by the Administration to promote coverage by giving marketplace advantages to states as retirement plan providers, with no reasonably apparent policy justification to suggest states are somehow going to do a better job providing retirement plan products,” said American Retirement Association CEO Brian Graff.
(subscriber only) that earlier in November, the proposed rule left the White House Office of Management and Budget
, where it had been since early September. In July, President Obama directed Secretary of Labor Thomas Perez
to publish, by the end of the year, a proposed rule to “provide a clear path forward for the states to create retirement savings programs.” His directive to the DOL: Clarify how states can move forward with various retirement plan coverage initiatives, including requirements to automatically enroll employees and for employers to offer coverage.
Earlier this year, Illinois became the first to adopt a state-based retirement savings program for private sector employees who do not have a retirement plan at work. Similar initiatives are underway in Oregon. Earlier this year Washington State launched a small plan marketplace, and approximately half the states are currently considering measures to close the retirement savings gap.
The American Retirement Association has been concerned that the DOL’s proposal would create an uneven playing field, providing state-run plans with an unfair advantage by exempting them from ERISA while not extending the same considerations to similar products offered by the private sector. It looks like those fears have been realized.