Reacting to a lack of coverage of retirement plans at work, many states have started working on legislation to require companies of a certain size to offer a payroll deducted retirement plan where people are 17 times more like to save than on their own. In order to encourage these initiatives, the DOL has proposed and recently finalized rules that would exempt these state from restrictions under ERISA which covers 401k and some 403b plans which may extend to large municipalities.
Eight states have already enacted legislation to create retirement savings programs for private-sector workers. Most of those laws require employers that do not offer workplace savings arrangements to automatically enroll their employees in payroll deduction IRAs administered by the states, while other state laws create a marketplace of retirement savings options geared at employers that do not offer workplace plans. Although other states are considering similar measures, uncertainty over the application of the Employee Retirement Income Security Act’s preemption provisions has proven to be a roadblock to broader adoption of such programs.
The final rule announced today provides guidance for states in designing programs by providing a safe harbor from ERISA coverage to reduce the risk of ERISA preemption of the relevant state laws. Importantly, the rule also protects worker rights by ensuring they have the ability to opt out of auto-enrollment arrangements. The rule will go into effect 60 days after its publication in the Federal Register.
The proposal to expand the safe harbor to include a limited number of larger cities and counties in response to comments received from members of the public will be open for 30 days of public comment after its publication in the Federal Register.
Some groups are concerned about the DOL’s action including the ICI (Investment Company Institute) which represents mutual funds companies which is concerned that the final rule has removed conditions that would have prohibited states from imposing any restrictions on employee withdrawals from IRAs allowing states “to ‘lock in’ employees and their savings, barring workers from moving their own money to private-sector IRAs that offer lower costs and a broader range of options.”
Others are concerned that the state plans have an advantage over private plans that must follow the rules under ERISA which provide protection but also increase costs and liability.
Some companies with employees in multiple states are concerned about the hodgepodge of retirement plans that they must now follow even if they offer retirement plans especially if they impose waiting periods on new employees.
Coincidently, the California State Assembly last week approved a measure to create a state mandated auto-IRA programs, which experts say is likely to be signed by the Governor after a vote on recent amendments, making them the eighth state to approve such a measure.
