It is not news that Americans aren’t saving enough for retirement. But, what is news, is that this Administration seems to be bent on making some meaningful change on that front with the enactment of one particular solution – state-based retirement plans. After hearing the marching orders of the President to clear the path for state-based retirement savings initiatives (including legislation that automatically enrolls employees in IRAs), the Department of Labor has declared VICTORY!
But let’s take a closer look. What did the Department actually do? And will it withstand public commentary, let alone judicial scrutiny?
Last week, the Department issued two pieces of guidance: an Interpretive Bulletin and a Proposed Regulation. Each attempts to tackle a different element of the state-based IRA arena:
- ERISA-Covered Plans, But No Preemption?
Performing a little fancy footwork, the Department issued an “Interpretive Bulletin” (which is, in effect, an interpretation of the Department’s reading of ERISA) in which it describes three specific platforms which purport to allow voluntary employee savings in IRAs. While the Department admits that ERISA will apply in these situations, it rather boldly asserts that the broad preemption provision embedded in the ERISA statute will not preempt these platforms.
Let’s set the scene: ERISA Section 514(a) outlines a sweeping preemption clause claim that ERISA “shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan”. Guided by its desired result (allowing state laws which help employers establish ERISA-covered plans for their employees), the Department interprets ERISA as “leav[ing]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 only three approaches that the Department avails this special treatment are:
- The Marketplace: Borrowing language from the ACA, the private savings marketplace approach contemplates a state establishing centralized location where private sector employers could “shop” from a menu of savings arrangements. The marketplace would not itself be an ERISA-covered plan, and the arrangements available to employers through the marketplace could include both ERISA-covered plans and other non-ERISA savings arrangements.
- The Prototype: Again borrowing from another employee benefit concept, the Department describes the “prototype” approach in which a state would make available a “prototype plan” that individual employers could choose to adopt. Under this approach, any 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.
- The MEP: The final approach described in the interpretive bulletin is the statement’s establishment of a “multiple-employer plan” or MEP. Eligible employers could, at their election, join the State MEP rather than establish their own separate plan. The MEP would be run by the state or a designated third-party.
The Department’s described reasoning for finding that these three approaches will not be swept up by ERISA’s preemptive principles is that these approaches, and the involved state activity, do not “undermine” ERISA’s exclusive federal regulation of covered employee benefit plans. These approaches do not mandate employers to adopt or participate in ERISA plans, nor do they mandate any particular benefit structure. The key for the Department is that these programs will remain fully subject to ERISA’s regulations, obligations, and remedies.
- State-Required Payroll Deduction IRAs are NOT ERISA Plans?
The DOL issued proposed rules “clarifying” the definition of “employee pension benefit plan” to carve-out payroll deduction programs required by state law. Since these plans purportedly will not qualify as employee benefit plans, they therefore should not be preempted by ERISA. This new “safe harbor” builds off the 1975 “safe harbor” regulation the Department issued to clarify the circumstances under which IRAs funded by payroll deductions would not be treated as ERISA plans.
The new safe harbor regulation attempts to follow the structure of laws implemented or proposed to date in certain states (including Oregon, Illinois, and California) and hinges on the existence of the central role played by the state contrary to the limited role played by the employer. In order to qualify for the safe harbor exemption from ERISA, the following program requirements must be met:
- The program must be established by a State pursuant to State law
- It must be administered by the State that established the program, or by a governmental agency or instrumentality of the State (Note, however, that one or more service or investment providers may be engaged to help operate and administer the program, provided that the State (or its agency/instrumentality) retains full responsibility for the operation and administration of the program)
- The State (or its agency/instrumentality) must be responsible for investing the employee savings or for selecting investment alternatives from which employees may choose
- The State must assume responsibility for the security of payroll deductions and employee savings
- The State must adopt measures to notify employees of their rights under the program and must create an enforcement of rights mechanism
- Participation in the program must be voluntary for employees (Note, however, since the requirement is not “completely voluntary,” both the automatic enrollment with opt out and automatic increase contribution features continue to be allowed)
- The program cannot require that employees keep any portion of contributions or earnings in his/her IRA
- The program cannot impose any restrictions on withdrawals or impose any cost or penalty on transfers or rollovers permitted under the Internal Revenue Code
- All rights under the program are enforceable only by the employee, former employee, beneficiary, an authorized representative of such a person, or by the State (or its agency/instrumentality)
- An employer’s participation in the program must be required by State law
- A participating employer must have no discretionary authority, control or responsibility under the program
- A participating employer can receive no direct or indirect consideration other than the reimbursement of the actual costs of facilitating the program
- The involvement of the employer is limited in certain specific ways
Employer involvement is limited to ministerial tasks, which include the following: (i) collecting employee contributions through payroll deductions and remitting them to the program; (ii) providing notice to the employees (and maintaining records) regarding the employer’s collection and remittance of payments under the program; (iii) providing information to the State (or its agency/instrumentality) necessary to facilitate the operation of the program; (iv) distributing program information to employees from the State (or its agency/instrumentality); and (v) permitting the State or such entity to publicize the program to employees.
Employers are expressly prohibited from contributing employer funds (other than payroll deduction) to the program. Employers call cannot provide any “bonus” or other monetary incentive to employees for participating.
The proposed regulation has a 60-day comment period which is set to expire January 19, 2016. Commentary has already started in the industry, with stark criticism of the proposal which gives state-run programs an “unfair” advantage over private sector products aimed at achieving the same goals.
So, what’s your assessment? Did the Department pave the way for more saving for retirement? If so, did it do so within its legal boundaries. Only time will tell how the public and judicial branch view this guidance. And, if we have a change in political parties in the Oval Office come next November… One thing is safe to say; this is not the last word on state-based retirement savings.