State-Based Retirement Programs Inch Closer To Becoming Reality

The establishment of state-based retirement programs for workers moved a few inches closer to reality on both the federal and state levels last week.

At the federal level, the Department of Labor (DOL) said it has developed proposed rules to clarify how such programs can be established without running afoul of the Employee Retirement Income Security Act (ERISA).

In general, such programs require employers not currently offering a retirement plan to automatically enroll their workers in an individual retirement account (IRA), or else the programs call for such plans to be made available to employers who have no such plans currently. In most cases, these programs and proposals focus on private sector employers with no current plans. However, at least program seems to be open to all employers without a plan currently. Virtually all limit the programs to small employers.

DOL’s proposed rules “will set forth circumstances in which states can administer auto-enrollment IRA savings programs, funded with payroll deductions, without requiring employers to create ERISA-covered plans,” said DOL Secretary Tom Perez in a blog he posted after a press conference on the subject.

Sore point

Uncertainty about exposure to ERISA rules has been a sore point for many small employers who have looked at the state-based programs and proposals. Some businesses have expressed possible interest in offering a state-administered plan but they don’t want a program that is subject to ERISA due to the complexities, time commitment, costs, liabilities and other factors involved.

The proposed rules are now under review at the federal Office of Management and Budget. Specifics will come out once the proposal is published for public comment, Perez said.

Publication is expected by year end, according to the administration’s July directive to DOL to develop the rules.

At the same time, DOL also plans to issue guidance on how states might pursue an alternative approach that would promote the creation of ERISA-covered plans, Perez said in his post. Such plans “would be fully subject to ERISA’s rights and protections,” he said.

In the administration’s July directive, the White House had noted that a few states already have passed laws creating their own workplace-based retirement savings plans, and “more than 20 others” are considering doing so. However, “states remain concerned about a lack of clarity regarding preemption” by ERISA, the administration said.

The proposed rules would clarify this “including with respect to requirements to automatically enroll employees and for employers to offer coverage,” the White House said.

Maryland legislature initiative

On the state level, the Maryland legislature has moved one step closer to establishing such a program.

In a joint press conference this week, Maryland Senate President Thomas V. Mike Miller and Maryland House Speaker Michael E. Busch said they are forming a Commission on Maryland Retirement Security and Savings, according to Perez, who attended the conference.

This legislative initiative follows the February release of “The Report of the Governor’s Task Force to Ensure Retirement Security for All Marylanders.” The 24-page task force report assesses the status of retirement security in Maryland, finding among other things that 1 million workers in Maryland’s private businesses do not have an employer-based retirement plan.

“Other states and other governments have found ways to improve retirement saving and are taking action,” the report said, concluding that “Maryland can, too.”

The proposed solution is “to ensure that everyone who works has access to a retirement plan – a plan that enables them to save automatically out of every paycheck and whose funds are invested.”

The best way to provide access is to “make sure that employers offer such plans,” the report said. This should be done “in ways that even small businesses can afford, by using their current payroll systems and without extensive financial commitments or burdensome regulatory requirements.”

A news report by Michael Dresser of The Baltimore Sun, points to a less than enthusiastic response to the idea from the office of Gov. Larry Hogan.

The article quotes Hogan spokesman Doug Mayer as saying that Hogan is “very concerned about Marylanders saving for the future” but skeptical of measures that add to the state’s government bureaucracy or that increase burdens on small businesses and taxpayers.

The Maryland task force report shows the status of 15 states that, as of February 2015, had taken steps to establish state-run or state-administered workplace retirement programs for companies that currently do not offer retirement plans. According to the chart, only three states — Illinois, California and Massachusetts — had enacted enabling legislation, and only two of the three — Illinois and Massachusetts — have an “authorized program.”

Small firms have another alternative too. This is the voluntary My Retirement Account (myRA) program created by the Obama administration in early 2014. It has been slow to get off the ground, and that has opened the door to states to develop their own proposals.

Whether clarification of the ERISA issues related to the state plans will trigger more activity is the front-burner question right now.

InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].