New York City Private Sector retirement plan proposal
The New York City Comptroller has proposed a program (the “New York City Nest Egg”) that would default every New York City worker into either a qualified plan or an IRA. The proposal is interesting in a number of respects. It’s the first private sector retirement program proposed by a “political subdivision” of a state (in this case, a city). In addition to an auto-IRA (the “NYC Roth IRA”), it includes a “curated NYC 401(k) Marketplace” and city-sponsored multiple employer plan (MEP) (the “Empire City 401(k) MEP”). Drawing on the work of a group of NYC officials and academics, it includes a number of interesting design innovations – including a sliding scale for default contributions and investment “exclusively in passively-managed lifecycle funds.”
At this point, the NYC Nest Egg is simply a proposal. To become law, it will have to be approved by the NYC City Council, the Mayor and (conceivably) the state. In addition, some aspects of the proposal may require “approval” (or some sort of relief) from DOL and the Department of the Treasury. In the process of getting required approvals, we assume that the substance of the NYC Nest Egg may change, perhaps radically.
Relevance to plan sponsors
As we have discussed in the past, state (and state subdivision) retirement savings programs for private employers are of interest to plan sponsors for a couple of reasons. First, while all of these proposals generally exempt employers that “currently offer a workplace retirement plan,” it’s possible that sponsors with uncovered groups or uncovered employees (e.g., part-time or seasonal employees) may (to some extent) be subject to a state-program mandate.
And, second, some sponsors may find state sponsored plans a more efficient way to provide retirement savings to their employees. In this regard, as discussed below, currently states and cities are the only entities that can provide “Open MEPs.”
In what follows, we begin with some background on state private sector employer savings programs and on the issues presented by similar programs for “political subdivisions” of states, e.g., a city or county. That discussion is generally relevant to the issue: What is the scope of the state/city retirement plan project – what sponsors will it affect and how?
We then summarize the proposal and discuss some of its more interesting aspects. It’s probably most useful to think of the NYC Nest Egg as one constituency’s (government officials and academics) view of retirement savings “best practices” and as a contribution to the dialog over 21st century retirement savings policy. Thus, the substance of the NYC Nest Egg proposal is relevant to the second sponsor issue – the possibility that state plans may be an attractive option for certain sponsors. Indeed, the proposal includes design innovations that some sponsors may want to consider incorporating their own plans.
State subdivisions and DOL regulation of state retirement savings arrangements
In August 2016, DOL finalized the regulation providing a “path forward” – in effect, an exemption from ERISA coverage – for state private sector employer savings arrangements. We discuss the relief for state arrangements in our article DOL finalizes rule for state-run plans. Briefly and oversimplifying a lot: the DOL regulation provides relief for state programs mandating that private employers (other than employers already providing a retirement savings plan) provide an auto-IRA arrangement, provided certain requirements are met.
While the final DOL regulation did not provide relief for similar programs of state subdivisions (e.g., cities), a proposed regulation released at the same time would provide such relief. Under the proposal, to qualify for relief, the state subdivision:
Must have “authority, implicit or explicit, under state law to require employers’ participation in the payroll deduction savings program.” This would exclude “special purpose” entities such as, e.g., a water authority.
Must have “a population equal to or greater than the population of the least populous state.” The least populous state is Wyoming (population 586,107).
Cannot be “within a state that has a state-wide retirement savings program for private sector employees.” According to DOL “eight states presently have adopted laws to implement some form of state-wide savings program for private-sector employees.”
After these requirements are applied, DOL estimates that “the universe of potentially eligible political subdivisions [is] approximately 88.”
NYC “curated marketplace” and MEP – ERISA preemption
As noted, the NYC Nest Egg proposal includes a “curated 401(k) marketplace” and a city sponsored MEP. Both the marketplace and the MEP would involve qualified retirement plans that are (clearly) subject to ERISA. If, however, these elements of the NYC program are found to “relate to” an ERISA plan, they may be preempted under ERISA.
In an Interpretive Bulletin (IB) (released at the same time the above-discussed final regulation on state programs was originally proposed), DOL stated its view that “ERISA preemption principles leave room for states to sponsor or facilitate ERISA-based retirement savings options for private sector employees, provided employers participate voluntarily and ERISA’s requirements, liability provisions, and remedies fully apply to the state programs.” While, this language in the IB speaks only of “states,” the proposed regulation includes language extending its application to state subdivisions, “provided applicable conditions in the [IB] can be and are satisfied by the political subdivision.”
Ultimately, courts will determine whether ERISA preempts the NYC curated marketplace or the NYC MEP (or, more precisely, any city law implementing them). And it’s unclear to what extent the IB will affect that determination.
The NYC MEP and the nexus requirement
Oversimplifying somewhat, a MEP is a plan for more than one unrelated employer covering non-union employees. Under DOL rules, a person (e.g., a financial services institution) sponsoring a MEP must have some nexus of interest with the employers participating in it. As DOL puts it, the MEP sponsor must be “tied to the contributing employers or their employees by genuine economic or representational interests unrelated to the provision of benefits.”
Because of this rule, under current law, a financial services institution cannot develop and sponsor a plan, assuming most administrative and fiduciary burdens, and then simply sell it to all comers. There is a proposal in Congress to eliminate the nexus requirement if certain conditions are met.
The (above-discussed) IB, however, provided, in effect, an exemption from this nexus requirement for state MEPs:
In the Department’s view, a state has a unique representational interest in the health and welfare of its citizens that connects it to the in-state employers that choose to participate in the state MEP and their employees, such that the state should be considered to act indirectly in the interest of the participating employers. Having this unique nexus distinguishes the state MEP from other business enterprises that underwrite benefits or provide administrative services to several unrelated employers.
And as noted above, DOL has indicated that this exception to the nexus rule would also extend to state subdivisions, provided applicable conditions are met.
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With this background on the legal status of the NYC Nest Egg proposal, we now turn to its substance.
NYC Nest Egg proposal – generally
The NYC Nest Egg is an “all of the above” program. It includes all three of the approaches to state-plans-for-private-employers that have thus far been discussed:
A “curated” 401(k) marketplace – offering “both screened Roth and traditional 401(k) “prototype” plans and the publicly-sponsored Empire City NYC 401(k) MEP, and encourage[ing] the use of SEP/SIMPLE IRAs.” Screening criteria would include “low ‘all-in’ fees for administration and investments. … [V]endors would need to be selected to handle investments and/or recordkeeping in a transparent, objective manner based on the best combination of price and quality.”
An Empire City 401(k) Multiple Employer Plan – in effect, an NYC-sponsored “Open MEP.”
An NYC Roth IRA – similar to other state-sponsored private sector auto-IRA programs. Unlike those other programs (e.g., in California, Connecticut, Illinois, Maryland and Oregon), however, the NYC Roth IRA would be mandatory for all employers (regardless of size) who do not otherwise offer a workplace retirement plan. The NYC Roth IRA would provide for default investment of the first $15,000 of savings in a _my_RA. And it would provide “[a]ccess to guaranteed income at retirement through annuities.”<.li>
Each element of the NYC Nest Egg (marketplace, MEP and auto-IRA) incorporates a set of common features, reflecting what the program’s designers generally view as current best practices:
Default contribution rates based on earnings and age: Rather than use a single default contribution rate (e.g., 3%), the NYC Nest Egg anticipates a default contribution rate that increases with earnings and age. The proposal also anticipates that the default contribution rate will be “dynamic” – responsive, e.g., to investment performance:
For example, the default rate for, say, a 52-year-old earning $73,000 would not be fixed. The rate would be responsive to investment returns such as stock and bond market returns, and other factors. If stock market returns have persistently fallen short of expectations, the Board could alter suggested contribution rates to keep savers on track.
Predictable lifetime income stream: The proposal clearly intends that the program address the issue of lifetime income in an account-based plan. But it appears that (as with policymakers more generally), there is no consensus as to the right lifetime income solution. “Two approaches emerged for integrating a lifetime stream of income payments into the NYC Nest Egg plan, and both are presented for further consideration by policymakers: Option 1: Default annuitization into a partial annuity at retirement; … Option 2: [I]nclude annuitization on the menu of available options for participants, while actively educating and encouraging savers to voluntarily opt-in.”
_my_RA for the first $15,000: Generally, the proposal contemplates investment in a _my_RA until the employee’s account balance exceeds $15,000. The proposal acknowledges that “[t]he use of _my_RA as an investment vehicle for employer-sponsored 401(k) plans selected through the Marketplace and for the Empire City 401(k) MEP would require additional exploration with the Treasury Department; making _my_RA available to a 401(k) would likely require federal approval or regulatory changes ….”
Passive-only target date funds for accounts above $15,000: Once the $15,000 _my_RA limit is exceeded, “the default investment for all marketplace offerings would be passively-managed lifecycle funds.”
Automatic enrollment with opt outs for employees: “All NYC Nest Egg components [i.e., the marketplace plans, the NYC Open MEP and the auto-IRA] would offer automatic enrollment to the fullest extent permitted by law.”
Low fees: Generally, the NYC Nest Egg proposal is designed to keep fees low (e.g., through the exclusive use of index funds).
Leakage and rollovers: “To promote the goal of increasing retirement savings, the NYC Nest Egg plan would seek to limit loans and/or hardship withdrawals, accept rollovers to the extent permissible, and educate participants about the benefits and costs of rolling over NYC Nest Egg funds or liquidating accounts.”
What does all this mean?
The NYC Nest Egg is a very ambitious proposal, and there are a number of significant hurdles it will have to clear before it can be implemented. As we said at the beginning, it’s probably most useful to think of it as one constituency’s view of retirement savings best practices and a contribution to the dialog over 21st century retirement savings policy. In that regard, we would identify (in no particular order) the following features of the NYC Nest Egg as particularly interesting:
The use of a dynamic default contribution rate, reflecting age, income and (conceivably) investment performance.
The use of a “curated” marketplace. It’s probably most useful to think of this “marketplace” as a branding tool – plans in the marketplace would, in effect, have the imprimatur of the NYC Nest Egg Board.
Passive-only investments. The passive vs. active investment controversy continues, and the City of New York, as influential as it may be, is not going to settle it. An interesting question: to what extent do NYC public funds provide for actively managed investments/investment options? How to address – and bring down – “the cost of investment” remains an issue of both intense interest and intense controversy.
Coverage of all employers. As noted, the NYC Nest Egg would mandate an employer-provided savings program (at minimum, an auto-IRA) for all employers, no matter how small. While (again) that seems very ambitious, as the proposal notes “Over 400,000 New York City workers who are not covered by a retirement plan work for employers with fewer than 10 employees.” That’s a fair point: if you’re serious about getting as many employees as possible covered by an employer-provided retirement savings arrangement, an exception for very-small-employers may not be appropriate. But including those employers (by, e.g., mandating that they provide an auto-IRA) puts intense pressure on the system to deliver a very-efficient, very-low overhead retirement savings product.
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It is, at this point, unclear where the state (and now, city) retirement savings program project is headed. It began as a second-best choice, after passage of federal auto-IRA legislation was foreclosed by Republican Congressional opposition. Some states (e.g., Oregon) are very close to implementing programs. And as implementation approaches, some in the industry are reconsidering whether a federal solution might be a better alternative than a patchwork of state and city mandates.
Thus, the NYC Nest Egg can be seen either as another proposed set of local retirement savings options/mandates or as simply creating more pressure to find a federal solution, with some ideas about what that solution should look like. It was, in any case, produced by some serious retirement policy “thinkers” and is, in many respects, thought provoking.
We will continue to follow this issue.
October Three Consulting, LLC is a full service actuarial, consulting and technology firm that is a leading force behind the reemergence of defined benefit plans across the country. A primary focus of the consultants at October Three is the design and administration of comprehensive retirement benefits to employees that minimize the financial risks and volatility concerns employers face.
Through effective plan design strategies October Three believes successful financial outcomes are achievable for employers and employees alike. A critical element of those strategies is the ReDB® plan design. The ReDefined Benefit Plan® represents an entirely new, design-based approach to retirement and to the management of both the employer’s and the employee’s financial risk, focusing on maximizing financial efficiency and employee value.