On August 25, 2016, the U.S. Department of Labor (DOL) released its Final Rule that will facilitate state legislatures in establishing employee retirement savings programs that are ERISA compliant. Currently, roughly one-third of all workers do not have an opportunity to save for retirement through retirement savings accounts offered by their employers. To date, eight states, including Illinois and California, have already passed legislation which creates retirement savings account programs for employees. While the specific rules of these employee retirement savings programs vary for each state, all of them have the purpose of encouraging residents of their State to save for retirement. Often this is accomplished through a state “auto-IRA” law which requires employers that do not offer workplace retirement savings programs to automatically enroll their employees in payroll deduction IRAs administered by the state.
One of the major concerns of these state retirement savings programs has been that such legislation would be preempted by ERISA. The DOL’s final rule provides that such state retirement savings programs are not an ERISA plan and will likely not be preempted by ERISA if the programs (i) are established by and administered by the state, (ii) provide for a limited employer role, and (iii) are voluntary for employees. The Final Rule provides that each state must be responsible for investing the employee savings and must also select the investment alternatives from which the employee will choose. With regard to the limited employer role, the Final Rule limits employer activities to certain ministerial tasks, such as collecting the payroll deductions and remitting them to the program and distributing official state notices about the program to the employees. In the state administered programs, the employer is not permitted to contribute employer funds to the IRA and the employer participation in the retirement program must be required by state law, not voluntary. Finally, the program must be voluntary for the employees. An automatic enrollment requirement is allowed. However, the employee must be given notice of and have the right to opt out of the program.
We anticipate the Final Rule will become effective around November 1, 2016. Employers can anticipate that additional states now will push ahead with their own efforts to create state retirement savings programs, now that the DOL final rules have been issued.
From a practical perspective, employers should consider taking this opportunity to review their current employee retirement savings programs with counsel to ensure compliance with current state laws and should be prepared for potential future state legislation in this area.