Following the news last week that the Department of Labor (DOL) finalized a rule on state–run retirement saving programs for private sector workers and that the California state legislature has passed a bill approving implementation of the California Secure Choice Retirement Savings Program, here’s a chance to test how up–to–date you are on the state of state–run retirement initiatives.
Secure Choice and its cousins
The California program has now been passed by both the state Senate and the state Assembly and requires only the Governor’s signature to become law. Once that happens, that will bring the number of states to have passed legislation implementing programs that include auto–enrollment to:
Answer: (c) five. Illinois was first , followed by Oregon, Maryland and Connecticut. So California would make five. Washington and New Jersey have taken a different approach, creating voluntary marketplaces, which do not incorporate auto–enroll. Minnesota, Vermont and Virginia have passed study bills. A number of other states have considered or are considering legislation.
The impact of auto–enroll
Roughly how many workers will be auto–enrolled (unless they opt out) in those five states once the programs are fully implemented?
(a) One million
(b) Five million
(c) Eleven million
(d) Thirty million
Answer: (c) eleven million (seven million in California alone). That’s more than 15% of the population of those states and a lot of people. Nationally, the coverage gap remains a significant political issue.
ERISA and the states (part 1)
The DOL last week finalized a rule that explicitly grants safe harbor exemption from ERISA for programs such as California’s. Which of the following constraints are specified in that rule (you may choose more than one):
(a) Employers may not contribute
(b) The program must use IRAs
(c) The program must be mandatory for employers
(d) There must be a named fiduciary
Answer (a), (b) and (c). The rule applies to state–run programs that are mandatory for private sector employers (generally only those over a certain size), that feature auto–enrollment and that invest through IRAs. Even though the state initiatives will expand coverage, doing so outside ERISA means missing out on some of the protections offered, missing out on the possibility of any employer contributions, lower contribution limits than apply to 401(k)s, and so on.
State–run multiple employer plans
At the same time as the DOL first floated the rule last year, they also issued an interpretive bulletin arguing that state–run multiple employer plans (MEPs) would not be subject to the “organizational nexus” requirement that has been applied to private–sector MEPs. The rationale for this was:
(a) “a state has a unique representational interest in the health and welfare of its citizens”
(b) “a state would be able to run such a program more cost–effectively”
(c) “states are not motivated by considerations of profitability”
(d) No rationale was put forward
Answer (a). Unsurprisingly, there has been a lot of push–back on this.
ERISA and the states (part 2)
In light of the interpretive bulletin opening the way for state–run MEPs, how many states are likely to create these plans in the next five years?
(b) At least one
Although strictly speaking we’ll need to wait to find out the answer to this question, my money is very much on (a). That’s because the appetite amongst state officials for stepping into the world of ERISA (which these programs certainly would) is minimal. Instead, there is growing momentum in favor of allowing private sector open MEPs to step into the breach. So, even though there is much talk of a level playing field between states and the private sector, there’s every chance that—if it’s created—only one of the teams would show up to play.
How did you do?
If you scored five out of five, well done. The bottom line here, though, is that these issues are very much in motion at present. What happens next is far from clear. For employers, there are open questions, such as how the various state programs will interact with one another and whether they will apply to employers who do not offer plans or to employees who are not eligible (for example, who have not yet become eligible for their employer’s plan.) Is there a possibility that as the number of state plans grows, calls begin to replace them all with a single Federal–level program? What will happen with regards to private sector open MEPs?
These and other questions will continue to play out over the coming months.