In a move that is sparking a firestorm of
protest regarding the extension of retirement plans to uncovered workers, the US
House of Representatives advanced two bills to overturn federal rules that would make it simpler for states to
start individual retirement accounts (IRAs) for private-sector workers who do
not have 401(k)s.
The February 15 vote in the Republican-controlled House of
Representatives seeks to delay a US Department of Labor (DOL) regulation that
was passed in August 2016 that set up a procedure for individual states that
would allow workers to enroll in IRAs that would be funded through employer’s
payroll deductions. Currently, these
plans are available in about half of the 50 states.
At issue are whether the plans, known as
Secure Choice Plans (SCPs), or “auto-IRA plans,” would allow designated
private-sector employers to automatically deduct a percentage of their workers’
pay and forward it to state-sponsored IRAs and 401(k)s.
The proposed IRAs would have contribution limits of
$5,500 each year, plus $1,000 for employees 50 and over. These are similar to current
One operational sticking point was that the
rules in the Employee Retirement Income Security Act (ERISA) of 1974 regarding 401(k)
plans did not allow states to implement payroll deduction IRAs because it wasn’t
clear how ERISA would regard state-based 401(k) plans. However, the DOL rule
enacted last summer would prevent ERISA from pre-empting state law. In this
case, states that already had their own regulations would be able to establish IRAs
and be exempt from ERISA.
But on the political front, well-funded
advocates on both sides are lining up to push their positions. At issue is whether workers with
no retirement coverage in the private sector should be able to enroll in
state-sponsored 401(k)s. The concern is that employers may push
participants out of their private plans and into those run by the state.
number of workers without access to 401(k)s is huge: AARP estimates that 55 million workers cannot save for retirement
from their regular paycheck. A Government Accountability Office (GAO) study found that about
half of private-sector workers in the United States, especially those working
in low-income jobs or employed by small firms, lacked coverage from an
employer’s retirement savings program primarily because they lacked access.
According to GAO’s analysis of 2012 Survey of Income and Program Participation
(SIPP) data, about 45% of private-sector US workers participated in a workplace
retirement savings program. The GAO said among those not participating,
the vast majority (84%) lacked access because they either worked for employers
that did not offer programs or were not eligible for the programs that were
In its 2015 recommendation,
the GAO suggested that Congress “consider providing states limited flexibility
regarding ERISA preemption to expand private sector coverage. Agency actions
should also be taken to address uncertainty created by existing regulations.
Agencies generally agreed with GAO’s recommendation.”
So far, 28 states
have enacted or are exploring legislation to allow workers
to have access to retirement plans, according to the Pension Rights Center.
States that have enacted this legislation to date are California, Connecticut,
Illinois, Maryland, Massachusetts, New Jersey, Oregon and Washington.
The Massachusetts plan is currently available for workers at small
nonprofits, but the state has introduced legislation to expand the program to
private-sector workers who don’t have a 401(k).
California’s Secure Choice program is one of the newest efforts to
be put in place. Gov. Jerry
Brown signed a
bill into law in September 2016 that
established the program.
Extending Retirement Benefits Become Political
While the proposal is straightforward, the
House of Representatives vote has ignited a firestorm of competing positions
from the political right and left.
Republicans generally consider a plan that extends retirement savings
accounts to uncovered workers to be an imposition of state and federal
regulation into the private sector.
The conservative Heritage Foundation said the
proposed program would hurt savers and cost taxpayers.” An article by Rachel Greszler, Senior Policy Analyst, Entitlement Economics at the Heritage Foundation, argued the SCP program was “the equivalent of
Obamacare for retirement savings—that is, if you like your current 401(k), you
may not be able to keep it.”
Similarly, Will Hansen, senior vice president
of retirement policy for ERIC, a group representing the largest 100
corporations in the US, said his group was opposed to the DOL rule to rescind
coverage because “we realize that states are infringing on rules that offer
retirement plans. We are not against the state implementing a state-run plan as
long as it does not infringe on employers that already run retirement
As an example of state overreach, Hansen cited
legislation in Oregon that might regulate employers who are already offering a
plan, but would imposed minimum standards that exist at the federal level, such
as who is eligible to be covered, rules covering minimum number of hours worked
annually, and age. The Oregon legislation would force employers to include
seasonal workers and those under age 21, he said. ERIC’s position, he said, was
that the DOL rules should “not infringe on any employer who offers a
federally-compliant, ERISA retirement plan. We needs to agree on retirement
coverage in America, but our members think this DOL rule is going to hurt our
members and their ability to enroll in a plan,” he said.
In an ERIC report, the group also said it was concerned
by the addition of a 90-day requirement that would
force an employer who provides a retirement plan to employees to file an
exemption or conditional exemption if the employer offers the retirement plan
to all or some of its employees within 90 days of being hired.
ERIC said this would harm “large employers who
design their retirement plans with a range of eligibility dates, so long as the
eligibility date is in compliance with federal laws and regulations.”
An alternative view was offered by Hank H.
Kim, Executive Director and Counsel, National Conference of Public Employee Retirement Systems, Washington, D.C., who said in a
“The Secure Choice Pension model is a beacon
of hope for the 55 million Americans who don’t have access to a workplace
retirement savings program. A dozen states and cities have chosen to facilitate
the creation of workplace savings programs after years of analysis, study,
debate, and legislative action, and more are poised to follow suit. Now,
Congress could hobble these innovative programs by using an obscure law to get
rid of regulations that provide legal protection to state-facilitated IRAs.
“These state-facilitated plans were devised to
fill an unmet need that American workers and small business owners are
clamoring for. Employer-based retirement plan sponsorship rates have been
declining for decades. Today, only about one-half of workers are even offered a
plan. The private sector has not solved this problem, and that’s why states
invested years in research and study to develop public-private sector
“We’ve heard the alternative facts advanced by
the sponsors of these resolutions, but they don’t hold up under scrutiny.
State-facilitated retirement savings plans would be responsibly managed for the
benefit of savers and only savers, would meet the needs of employers, and would
ultimately save taxpayers billions of dollars. Helping the states navigate the
most effective way to provide additional retirement security for Americans is
the right thing to do.”
But due to its scope and complexity, this is
not a black-and-white issue. Chris Tobe, vice president of investments, First Bankers Trust, said that while he is “a huge supporter of the fiduciary rule and
hopes that Republicans let it continue, I like the concept of providing lower-fee
options for non-government employees, but I have been very suspicious of this
initiative. I see this as connected with the Hillary Clinton initiative backed
by Blackstone, which has been frustrated by its inability to get its high-risk,
high-fee products into corporate 401(k) plans. Like in public defined benefit
plans exempt from ERISA, I believe Blackstone felt that a public DC plan could
be a back door for them to get their products into this market. I believe
because of Citizens United, these public plans would be susceptible to
politicians pushing them into high-fee products in exchange for untraceable donations
to their super PACs, etc.”
III, CEO and Managing Member at InvestSense, said “While I believe the House’s
actions are mainly motivated by the desire to help big business, their point
about the fact that SCPs do not provide the consumer protections that ERISA
does is a valid concern, since SCPs would be administered by the states, some
of which do not have the best track record in fiscal management.
“On the other
hand, when over half the workers in the US (54.6%) do not have access to some
sort of a pension plan, that's obviously a situation that has to be addressed.
As an ERISA attorney, when I first heard about these plans, my first two
questions were first, do the rules have meaningful provisions to truly protect
a plan’s participants, since SCPs would not be covered under ERISA? And
secondly, what provisions are included to effectively control the costs
associated with the plans and ensure prudent investment of the plans’ funds?
for low-cost index funds to be included in any SCP since they are cost
effective and minimize any potential conflicts of interest. He also suggests
that the best option would be some sort of hybrid SIMPLE-IRA plan. “This plan
would provide the protections provided under ERISA with minimum, and relatively
easy, regulatory/compliance time and costs. The employer would make the
contributions and receive the tax deduction. The plan participant would have
the right to select the investments in their plan, which would be limited to
index funds as investment options. Again, there are no clear black and white
answers here, but I think a modified SIMPLE-IRA plan has merit in terms of cost
efficiency and being in the “best interests” of plan participants in terms of
providing protection and a meaningful chance to save for retirement.”
By Chuck Epstein