The DOL ERISA exemption for State Plans granted to state auto-IRA plans looks likely to be lifted after both the House and Senate following party lines voted to override the rule. Focused on covering the gap of the 50% of workers who do not have access to retirement savings plans at work with five states ready to roll out a plan and dozens considering it, questions abound. Will lifting the ERISA exemption for State Plans cause employers to be reluctant to jump into these plans and do state plans pose more problems than they solve?
The issues that companies face when offering retirement plans at work like 401ks include costs, work and liability. State auto-IRAs were designed to overcome the first two issues by making the plans easy to create and administer with little to no cost – the DOL ERISA exemption addressed some of the liability issues.
But opponents to the state plans claim that lifting ERISA protection is not good for investors and that a patchwork of state plans overseen by the government creates issues for private employers with workers in multiple states. Others are concerned about companies dropping their 401k plan in favor of less costly and easier to administer state plans which are very restricted – investment options are limited without the ability to match at low deferral rates giving workers a false sense of security that they are saving enough for retirement.
In a passionate Op-Ed, California Senator Kevin de Leon suggests that state plans like the one he sponsored in California offer important options to the estimated 7 million California workers not covered by ERISA plans at work with no cost to employers and no impact on existing plans. Other proponents suggest that these auto-IRA plans are a good stepping stone for companies that might want to offer more robust retirement plans like 401ks that, for example, offer a match. State plans could also be considered to be pilot programs for a national federal program which could provide a foundation which states and the private sector could expand upon.
Most state plans are mandatory so lifting the ERISA exemption may be a boon for 401k plans by leveling the playing field. The move by Congress heralds the new thinking of the Trump administration and the Republican Congress which is likely to affect the DOL’s fiduciary rule with by delay or by overturning it entirely.
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