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The Government Accountability Office has released a report – Retirement Security – Federal Action Could Help State Efforts to Expand Private Sector Coverage. The report reviews (1) estimates of workplace retirement savings program coverage, (2) strategies being pursued by some states to expand coverage and (3) possible legal obstacles under federal law (primarily ERISA) to these state efforts.
While it covers some familiar ground, the report provides a useful summary of the current state of the state plan ‘movement.’ In this article we review the report and a couple of other recent state plan developments.
State plan proposals matter to plan sponsors for two reasons. First, while they generally do not cover employers who ‘already have a plan,’ depending on how they deal with uncovered groups and uncovered employees (e.g., part-time or seasonal employees) and minimum standards for ‘what is a plan,’ they may wind up applying even to large plan sponsors. And, second, they may in some circumstances provide a viable and more efficient retirement savings solution (more efficient than, e.g., a 401(k) plan), even for larger employers.
The GAO report begins by reviewing data about coverage and participation. Most of the findings are, by now, relatively well understood: roughly half of American workers are not covered by a workplace retirement savings plan. Coverage is lowest amongst lower paid employees and amongst employees working for small employers (under 50 employees).
It turns out that very little retirement savings is done directly through IRAs: “95 percent of money contributed to traditional IRAs in 2008 was from rollovers, primarily from employee benefit plans.”
The report identifies coverage by a workplace plan, automatic enrollment and financial incentives (e.g., matching contributions) as the primary drivers of retirement savings. The critical obstacles preventing the adoption of new plans by smaller employers are the “administrative burden and potential fiduciary risk” that adopting an ERISA-covered plan carries with it.
In this context, the Administration and some policymakers have proposed federal legislation that would mandate workplace coverage (where there is no ERISA retirement plan) by an auto-enrollment payroll deduction IRA, including Senator Harkin’s USA Retirement Funds proposal. Those proposals have been stymied by (generally Republican) opposition.
In the absence of federal action, some states have begun their own initiatives. The report reviews six ‘leading’ state plan initiatives: California, Illinois, Maryland, Massachusetts, Washington and West Virginia. We have discussed many of these initiatives in prior articles (see our articles How state Auto-IRA legislation may affect employers and The Illinois Secure Choice Savings Program and the DOL myRA letter). The report provides a useful summary of these programs and their current status.
Table: Summary of Efforts to Expand Workplace Retirement Savings Program Coverage for Private Sector Workers in Selected States
| California | Illinois | Massachusetts | Maryland | Washington | West Virginia | |
| Approach | State-run program | State-run program | State-run program | State-run program | State-facilitated marketplace | State-run program |
| Status | Enacted, conducting feasibility study | Enacted, developing implementation | Enacted, developing implementation | Not enacted | Enacted | Not enacted |
| Savings vehicle | Payroll deduction IRA | Payroll deduction IRA | Employee benefit plan (401(k) plan) | Payroll deduction IRA for worker contributions Employee benefit plan (profit sharing) for employer contributions | Payroll deduction IRA and SIMPLE IRA | Employee benefit plan or IRA |
| Target employer size | Employers with 5 or more employees | Employers with 25 or more employees | Not-for-profit employers with not more than 20 employees | Employers with 5 or more employees | Employers with fewer than 100 employees | Employers with no more than 100 employees |
| Employer participation | Certain employers are required to automatically enroll eligible employees | Certain employers are required to automatically enroll eligible employees | Voluntary | Certain employers are required to automatically enroll eligible employees | Voluntary | Voluntary |
Source: GAO analysis of state laws and bills, and testimonial information from knowledgeable industry representatives.
None of these state plans have actually been implemented. As the report notes, probably the most significant obstacle to adoption of a state plan is federal law and, especially, ERISA preemption: “While stakeholders noted multiple issues causing legal uncertainties for state efforts, the most prevalent and pervasive was ERISA preemption.”
The report’s discussion of preemption actually combines two issues, (1) ERISA preemption as such and (2) ERISA coverage. It’s worth taking a moment to be clear about these two issues.
ERISA preemption. ERISA preempts (‘supersedes’) state laws that ‘relate to’ an employee benefit plan. Courts have generally interpreted this provision broadly. If a state law establishing, e.g., an auto-IRA that is mandatory for all employers above a certain size is determined to ‘relate to’ a retirement plan, that law would be ‘superseded’ and thus unenforceable under ERISA.
ERISA coverage. Even if the state law is not found to run afoul of ERISA’s preemption provision, if the program established under it (e.g., a mandatory auto-IRA) is determined to be an ERISA plan, it would be subject to ERISA rules with respect to, e.g., fiduciary conduct. Many of the state programs we are discussing are intended to avoid the administrative and fiduciary burdens that come with ERISA coverage, and the implementation of some programs (e.g., California’s and Illinois’s) is conditioned on ERISA not applying to them.
The Department of Labor has issued a regulation providing that a payroll deduction IRA is not an ERISA plan “so long as (1) there are no employer contributions, (2) employee participation is completely voluntary, (3) without endorsing the program, the employer limits its involvement to permitting the program to be publicized and providing for contributions to be made through payroll deduction, and (4) the employer receives only reasonable compensation for any services rendered in connection with the program.”
But, with respect to the state programs, state government involvement, employer mandates (requiring that all employers above a certain size implement an auto-IRA) and auto-enrollment all may raise ERISA preemption/coverage issues. The GAO report states:
DOL officials said the regulation does not address whether certain program features states intend to use would cause the programs to be considered employee benefit plans. For example, some states would like to capitalize on the potential advantages of using automatic enrollment for workers and requiring certain employers to offer workplace access to retirement savings programs. If these features cause the programs to be considered employee benefit plans, stakeholders said there would be uncertainty regarding preemption.
In this regard, the report notes that at the July 2015 White House Conference on Aging, President Obama stated that:
By the end of the year, the U.S. Department of Labor will publish a proposed rule clarifying how states can move forward [with state retirement plan initiatives], including with respect to requirements to automatically enroll employees and for employers to offer coverage.
GAO stated that:
To address uncertainty facing state efforts, [DOL] is initiating a regulatory agenda entitled “Saving Arrangements Established by States for Non-Governmental Employees,” which will appear in the Fall 2015 Semi-Annual Regulatory Agenda. DOL expects to publish a Notice of Proposed Rulemaking by the end of 2015.
It’s not clear, however, that the preemption issue can be solved by regulation. As the GAO report noted, the scope of ERISA preemption has largely been defined by the courts, and “DOL officials said the agency’s role is limited under ERISA without further Congressional action – it can revise and promulgate regulations but there is nothing in ERISA that would allow it to waive preemption for state efforts.”
We note also that this year’s Administration budget included a proposal for a ‘pilot program’ “to assist in the start-up of retirement savings programs in states” and requested that DOL be authorized “to grant a temporary waiver of the preemption provisions of [ERISA]” for these state programs.
Other legal issues identified in the report included:
DOL concern that, where a state implements a payroll deduction IRA program falling outside of ERISA, ERISA protections would be lost. Of particular concern is the possibility that an employer might withhold employee contributions but not forward them to the plan’s trustee.
Conflicting DOL and Treasury policies concerning multiple employer plans. As we understand it, DOL may try to address this issue in the proposal it intends to produce by year-end.
Concern about whether certain return guarantees and pooling arrangements might violate Treasury regulations. The pooling issue is raised by, e.g., Massachusetts’s proposal, limited to not-for-profit employers, of a program that would pool both IRA and qualified plan money.
In default of a federal Auto-IRA solution, the Administration clearly favors these state initiatives. It will be interesting to see what sort of carve-out-from-preemption proposal DOL comes up with, before the end of the year.
We will continue to follow this issue.