At least 29 states have made efforts in recent years to expand retirement savings program coverage for private sector workers, according to a new Government Accountability Office (GAO) report.
The GAO tally is higher than the 17-20 states that earlier studies have identified.
The state initiatives are for private sector workers who have no access to a retirement savings plan at their place of employment. The proposals vary, but in one way or another, the states would run, administer, allow or make way for these savings programs. The goal is to nudge more people to save for retirement.
GAO found that states have enacted, enrolled, established or completed 15 of these initiatives or resolutions. In addition, three more actions are pending. However, 12 to 15 or more other initiatives were not enacted.
This suggests that state-based programs for private sector workers are taking a patchwork-quilt approach to adoption, with some states moving forward and others not.
Not right away
Advisors who work with smaller firms that may be interested in such programs won’t need to support their gearing up anytime soon.
That’s because there is less forward motion in the states on these programs than one might expect if only looking at the numbers of initiatives.
For example, based on the GAO study, most of the 15 measures that were enacted were calls for studies, not for actual savings programs.
Connecticut is one state mentioned. In June 2014, Connecticut enacted legislation to establish a board. The purpose: To conduct a “market feasibility study” for implementing a public retirement plan for private sector workers and to develop an implementation proposal. The report is due by Jan. 1, 2016, GAO said.
Likewise in Virgina, the state enacted a 2015 law calling for a “work group” to review current state and federal programs and other savings options, with a report due by Jan. 1 2017.
In Maryland, the governor established a task force on retirement security in 2014, and this task force issued a report early this year urging creation of a state-level program.
The GAO study shows many other examples of this, and the researchers note they may not have found all such efforts.
By comparison, only a few states have created an actual framework for a state-based retirement plan of some sort. These include the measures passed in California, Illinois and Washington.
What’s the hang-up?
Obviously, it’s not lack of interest that is keeping more states from actually establishing retirement savings programs. A key hold-up is state concern about exposure to litigation stemming from preemption by the Employee Retirement Income Security Act of 1974 (ERISA).
According to the GAO report, there are potential challenges having to do with “uncertainty” created by ERISA and by federal regulations that could delay or deter state efforts to expand coverage.
Generally, the researchers said, “ERISA preempts, or invalidates, any state law relating to ‘employee benefit plans’ for private sector workers, but different areas of uncertainty arise based on the details of each state effort.”
One example cited is that state-created payroll deduction individual retirement account (IRA) programs would not be considered employee benefit plans. Due to uncertainty created by ERISA, the researchers wrote, “it is unclear whether a state can offer such programs or whether some of the program features would lead a court to find that they are, or relate to, employee benefit plans.”
There is also uncertainty caused by regulations by the Departments of Labor (DOL) and the Treasury that are meant to assist workers and employers, the GAO report said. “For example, DOL's regulation on payroll deduction IRAs was written before these state efforts were proposed and omits detail that, if included, could help reduce uncertainty.”
Given the uncertainties, the GAO said, “states may face litigation, and stakeholders noted that state programs could lose tax preferences if they were ruled preempted by ERISA.”
GAO’s suggestion is that that Congress consider providing states with limited flexibility regarding ERISA preemption to expand private sector coverage. The federal researcher also suggested that federal regulatory agencies, such as DOL, take steps to address uncertainty created by existing regulations.
Might that happen? A note from DOL’s Employee Benefits Security Administration (EBSA), included at the end of the report, indicates that EBSA has added a project to its fall regulatory agenda regarding this issue. It will publish a proposed rulemaking by the end of this year, wrote EBSA Assistant Secretary Phyllis C. Borzi.
Why advisors might care
A lot of insurance advisors serve small- and mid-sized businesses. Sometimes, the advisor is a firm’s key point of contact on benefits matters. Should these firms ask about their state’s retirement savings plan proposal or initiative, that will open the door to retirement planning discussions that can create other advisory opportunities at both the personal and business level.
What is known now about the state-based plans is that 1) a lot of states are looking into them; 2) the federal government is exploring possible tweaks to ERISA to make them more feasible; 3) tweaks to ERISA take time to implement; and 4) this might be a good time to consider other options.
Owners of smaller firms may doubt that workers would even contribute to a retirement plan at work if made available. However, GAO found that “among workers who are least likely to participate—such as lower income, service sector and younger workers—the majority did so when they had workplace access.”
InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].
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