States Move Ahead with Auto-Enroll IRAs at Their Peril

States and municipalities that proceed with auto-enroll individual retirement accounts in the face of congressional opposition might not benefit from the Employee Retirement Income Security Act’s safe-harbor protections, a retirement plan expert said.

On March 6, the Senate introduced a resolution to dismantle Obama-era retirement rules governing payroll deduction programs run by states and cities. This resolution followed similar action earlier in the House of Representatives.

Lawmakers’ actions appear to cast doubt on the safe harbor status of auto-IRA plans.

The Department of Labor’s auto-IRA rule creates a safe harbor for state programs that require employers to make it easier to enroll in government-administered payroll deduction IRAs. The result is that such plans would not be considered employee pension benefit plans under ERISA.

“Though there’s some degree of uncertainty, it appears that states and cities can still require employers to do this under state law but there’s no safe harbor from ERISA plan status,” said Allison Wielobob, an attorney with Eversheds-Sutherland. Wielobob was formerly with the Department of Labor, and is a fiduciary liability expert.

“Without safe harbor guidelines, the DOL could come in and find that ‘You have an ERISA plan and you haven’t followed all the rules that come with that,’” Wielobob said.

Illinois and Oregon are scheduled to start auto-IRA enrollment programs in June. Connecticut and Maryland enacted auto-IRA laws last year.

At least 14 other states either have commissioned studies or have considered similar bills, according to news reports.

New York City Mayor Bill de Blasio last year called for local auto-IRA laws for businesses with at least 10 employees and no employer-sponsored plan.

Auto-IRAs Sound Public Policy?

The idea behind auto-IRAs is that employees are automatically signed up for a retirement savings plan funded through a payroll deduction.

Only workers without access to workplace retirement plans would be enrolled in government-sponsored IRAs, and the only way employees could decline would be by opting out.

Workers who are required to opt out rather than opt in are more likely to save for retirement, research among workers in employer-sponsored retirement plans has found.

States and cities consider the measure sound public policy as millions of Americans are underprepared financially for retirement. But the idea has been met with resistance from some lawmakers and some retirement industry segments.

Resolutions in the Senate introduced by Sen. Orin Hatch, R-Utah, would overturn the state and city rules.

In the House, similar measures introduced by U.S. Rep. Tim Walberg, R-Mich., and Rep. Francis Rooney, R-Fla., passed in February.

Lawmakers opposing the plans say the plans are symptomatic of big government, over-regulation and higher costs.

Industry opponents say the plans compete with many retirement investment choices and are unnecessary.

Proponents like auto-IRAs because the convenience of automatic enrollment gets workers started saving for retirement. The earlier people start, the more time their money has to grow through compound interest.

Another ERISA expert also believes states and cities could move forward with auto-IRAs regardless of what happens in Congress.

States and municipalities will be able to move forward with these programs regardless of the federal government, said ERISA litigation and employee benefits expert Patrick DiCarlo, an attorney with Alston & Bird.

“Congress may be able to block such measures, but I doubt there would be an interest in doing that, and I suspect we’ll have a situation where the federal government is not helping, but also not blocking states from adopting their own programs,” he said in an email.

Auto-IRA Plan Details

States and municipalities want to encourage small employers, the engine of economic growth, to offer government-sponsored retirement plans.

A sponsored retirement plan provides another opportunity for employees to save through the convenience of pretax payroll deductions, similar to 401(k)s offered at large companies or to 403(b)s made available by large nonprofits.

Under an auto-IRA model, state governments would responsible for investing the money.

Employers would collect payroll deductions and channel funds to the government-sponsored retirement plans while providing information to employees and maintaining records, as employers and retirement plan companies do in the 401(k) market.

Employees with workplace retirement plans are much more likely to prepare for retirement than those without access to retirement plans, retirement researchers have found.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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