State Retirement Plans (1 of 3) Overview — States getting into Retirement Policy with help from DOL
Summary: This is Part 1 of a 3 part series on state retirement plan legislation. States are experimenting with their own solutions to fill the gap of an effective national retirement policy. (Sound familiar? Remember health care reform in Massachusetts?). This is no longer a few states acting on their own. This is a trend. Here’s what we will cover today and in 2 more installments.
Part 1 – Background & Overview of State legislation. Part 2 – How the DOL is making it easier for the states to experiment (hint: it involves preemption). Part 3 – Some open questions and suggestions for employers.
Background. Concerned about retirement security and the lack of a national retirement policy, states have started to legislate on their own in the retirement plan space.
From an employer’s perspective the forms of legislation range from intrusive and burdensome to hands-off and door-opening. More on this in a few paragraphs, but first a little context.
Retirement security is starting to capture headlines in the financial and popular press. (Forbes) (What to Do About The Coming Retirement Crisis) (WSJ) (Baby Boomers Hugely Underestimate What They Need for Retirement) (MarketWatch) (Our next big crisis will be a retirement crisis) (FundReference) (8 Depressing Stats About America’s Retirement Savings) (Marketwatch) (retirement crisis stems from bad policies – not bad habits) President Obama highlighted this topic when he directed the Treasury to take steps to establish a national “myRA,” a voluntary IRA invested in bonds paying the same rate of interest as the Government Securities Fund. (whitehouse.gov) At the 2015 White House Conference on Aging President Obama urged the Department of Labor to get in the game by supporting various state efforts to promote broader access to retirement savings programs. (whitehouseconferenceonaging.gov)
That led to the recent DOL and EBSA guidance around how state initiatives can avoid ERISA preemption, the subject of Part 2 in this series.
For now, here’s a look at what’s going on in the states. Close to home, the Minnesota Women’s Economic Security Act (dorsey.com), signed in 2014 by Governor Dayton, requires a study by Minnesota Management and Budget to determine whether a state-sponsored retirement plan is needed for employees without access to an employer-sponsored plan. The latest word is that this study will be released in December 2015, presumably in time for the legislature to consider the topic in 2016.
Through its guidance, the DOL has identified 4 different types of state legislation. We could see more depending on the creativity of state legislatures. Here is the current landscape:
- State-administered IRAs with automatic enrollment. State administered IRAs are the most intrusive model we’ve seen. They are the subject of recent regulations proposed by the DOL. (DOL Proposed Regulations) The State of Illinois is a good example for this category. Legislation was signed in January 2015 requiring certain employers with 25 or more employees to make 3% payroll deductions and forward them to an individual IRA for the employee, part of a larger plan maintained by the State. (Chicago Tribune) (Illinois General Assembly). A big question for plans like this is how they work with an employer that has long waiting periods or chooses not to cover a group of employees in any plan but still satisfies the 410(b) coverage tests. (More on this in Part 3.)
- State run prototype plans. The next three types of plans are the subject of the DOL’s recent Interpretive Bulletion (DOL Interpretive Bulletin) So far the following approaches have only appeared as purely voluntary to the employer. More of a carrot than stick. In the first example, a state becomes a sponsor of a so-called prototype retirement plan. Banks and other financial institutions have played this role in the past, creating and maintaining documents that make it easy for a small or mid-sized employer to establish and maintain a plan. The key difference here is that the state assumes many of the responsibilities that would typically be imposed on the employer-sponsor. The employer does, however, act as the plan sponsor and retains associated liability under ERISA. Massachusetts used this approach to establish a state-run prototype plan for small, nonprofit employers. (Massachusetts Nonprofit Network) (Legislation Text)
- State-run Multiple Employer Plans (MEPs). The beauty of state-run MEPs is that they make it possible for an employer to avoid the role of plan sponsor under ERISA. This is a big deal. This approach is highlighted in Maryland’s “Improving Retirement Security for Marylanders” prepared by the Governor’s Task Force to Ensure Retirement Security for all Marylanders, issued in 2015. (Maryland DLL&R) See also State Open MEPs Ready to Bloom, but with Challenges. (BNA)
- State Marketplaces. Think of the State marketplace approach as a wholesale version of the health care exchanges. In this case, the state establishes (and presumably watches over) a one-stop shopping marketplace for employers looking to establish a retirement plan. Quite appropriately, Washington State, the State where Amazon.com is headquartered, has enacted legislation establishing a “small business retirement marketplace.” (Washington State) (Economic Opportunity Institute)
That’s it for Part 1. Parts 2 and 3 will be posted soon. Follow us on Twitter or LinkedIn for updates. The Pension Rights Center has one of the better trackers for state initiatives. (Pension Rights Center)