State Retirement Plans (3 of 3) — Will the States get it right on retirement policy?

This is Part 3 of our series on State Retirement Plans. We have to admit this has been eye-opening. We are pleased to see Lee Schafer’s column in the StarTribune on the topic this weekend. (Strib)

Retirement Policy

We are in a bad place when it comes to retirement policy in this country. We pointed to a few sources in Part 1. Here are some tidbits from those sources:

  • The Center for Retirement Research at Boston College estimates that 53% of Americans are at risk of not having enough money to maintain their living standards in retirement. (Forbes) (discussing new book “Falling Short: The Coming Retirement Crisis and What to Do About It“)
  • Many don’t understand what their 401(k) plan is worth. According to a BlackRock survey described in the Wall Street Journal, respondents in the 55 to 64 age bracket expected to have about $45,000 in annual retirement income while the amount they have saved is more likely to provide  $9,129 annually. (WSJ)
  • About 45% of Americans expect to work in retirement.  ( That has potential to create a logjam in the workplace. This would exacerbate problems for the millennials, many of whom entered the workplace during the “furniture burning years” of the Great Recession.
  • According to an Employee Benefits Research Institute study cited by Marketwatch, 43% of Boomers and “Generation Xers” are at risk of running out of money in retirement. That number goes up to 83% at risk when you look at lower income levels. (MarketWatch)
It’s good that this is getting attention and we are pleased the DOL is stirring the pot. We are collectively late to the game, but that’s no reason to ignore this gaping hole in public policy.

DOL Proposals

  • Part 2 of this series focuses on what we like least about the DOL’s proposals, mandated state-run, auto-enroll IRAs for employees without access to an employer’s retirement program.
  • Part 2.5 (Part 2 started to get too long) looks at some creative approaches endorsed by the DOL that have the States acting more as facilitators than Sheriffs.

Parting Thoughts

Since we started this series, we’ve learned that President Obama appears to be making retirement security one of his top issues during his final year in the White House. (FACT SHEET: Building a 21st Century Retirement System) Regardless of who occupies the White House next, we expect to be seeing plenty of action on retirement policy in the coming years. Here are some general thoughts we have around what’s going on with the DOL proposals.
  • Lots of Deference to States. The DOL, in its proposed regulation and Interpretive Guidance, assumes the States will get this right. Call us pessimists, but we’re not so sure the State of Illinois has a good track record when it comes to managing retirement plans. And Illinois isn’t alone. Take a look at this sobering report issued by the Pew Charitable Trusts. (Pew) When it comes to MEPS (open vs. closed) we think the DOL may be stretching it a bit to say that states have a nexus that allows them to act as sponsor for “closed MEPs” but a credible financial institution acting on its own for its clients may not. We think there’s lost opportunity here for innovation in the private sector. There was legislation proposed for the recent omnibus spending bill that would have relaxed regulation for open MEPs — both under the Internal Revenue Code and ERISA— but it didn’t make it into the final bill. The White House plan mentioned above seems to be bringing this back into play.
  • Execution by States is Critical. The DOL has spoken, so we go forward. To the State Legislatures, we say, be careful. The guidance isn’t carte blanche to go out and do anything you want. You might also look at your own pension liabilities before getting too righteous on this one. But progress comes in fits and spurts. We hope that the States will work with groups like the American Benefits Council, Pension Rights Organization and others as they enact legislation and, critically, as they implement the new laws.
  • What does the DOL Guidance to to Preemption? The American Benefits Council and others have expressed concern around what the DOL’s proposals say about ERISA preemption. Multi-state employers depend heavily on ERISA preemption to keep things neat and tidy when it comes to employee benefits. Diminution of ERISA preemption would be a bad thing and the DOL’s guidance gives us some concern on this front.
Please continue to send your comments and thoughts our way. We hope to have more to say on this topic during 2016.

Bob Seng

With plenty of experience in private practice and as an Assistant General Counsel for Pay & Benefits in a Fortune 50 Company, Bob understands that employee benefits law isn’t for everyone. That’s why he takes pride in listening carefully and responding with clear answers and advice that can be followed by busy clients.

Tim Arends

Chair of the Benefits and Compensation practice group, Tim devotes a substantial portion of his practice to evaluating the effect of employee benefit programs on mergers, acquisitions, reorganizations, corporate financing and similar transactions.

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