By Stephen Miller, CEBS
Cities and counties will now be barred from requiring small businesses without 401(k)-type retirement plans to enroll workers into a government-run individual retirement account (IRA).
Meanwhile, a measure to block a requirement for similar small businesses to participate in auto-enroll IRAs run by the state still awaits a Senate vote.
On April 13, President Donald Trump signed Congressional Review Act (CRA) resolution H.J. Res 67, which blocks an Obama-administration Department of Labor rule to push local governments to create auto-IRAs. The House and Senate had voted in favor of the resolution to nix the rule by party-line votes in March.
No municipalities had launched their own IRAs for nongovernment workers, although New York City, Philadelphia and Seattle all have considered doing so under the Labor Department rule, the New York Times reported.
The House also passed a resolution, H.J. Res 66, to roll back a DOL rule allowing state governments to set up mandatory auto-IRA programs for small employers that don't provide retirement plans for their employees. A Senate vote is expected when Congress returns later in April from its Easter recess, as May 9 is the deadline for passing a CRA resolution to block the rule.
Several state governments strongly support the DOL rule. Five states—California, Connecticut, Illinois, Maryland and Oregon—have passed laws to create programs.
The California Secure Choice retirement program, for instance, is slated to start in 2018 and would require private-sector employers with at least five employees, if they don't already offer a retirement plan, to enroll their employees in the program and to make automatic payroll deductions on behalf of employees who don't opt out.
Lack of ERISA Protections
Under the DOL rules, government-run auto IRAs would be exempt from many of the reporting and notification requirements imposed on private-sector retirement plans by the Employee Retirement Income Security Act (ERISA)—as are all IRAS—leading some critics to charge that the rules would create an uneven playing field in favor of government-run plans, and that employees' account would not be adequately protected.
"Unfortunately, in the final months of the Obama administration, the Department of Labor created what I consider to be a regulatory loophole that would ultimately force workers into a government-run IRA system," said Rep. Pete Sessions, R-Texas, chairman of the House Rules Committee, which held a hearing in February to consider the resolutions. "As a result, some employers will be forced to automatically enroll workers into a government-run IRA through payroll deductions. And unlike private-sector retirement plans, workers enrolled in these public-sector plans would not be afforded the important protections that were provided under ERISA."
The Society for Human Resource Management joined the U.S. Chamber of Commerce, the American Benefits Council and other employer and business groups in sending a letter to members of Congress supporting both resolutions to overturn the DOL rules. "If a state mandates auto-IRAs, some employers will decide to avoid taking on the work of offering their own plans and let the state take it on instead, resulting in the loss of significant retirement savings opportunities for their workers," the letter stated, among other points.
Regarding H.J. 66, the resolution to roll back the ERISA safe harbor for plans run by state governments, on April 14 Politico reported that "We're still waiting to see whether the Senate will schedule a CRA vote to block [the] DOL rule for state IRA plans. Right now it's unclear whether that second resolution of disapproval has enough Republican support."
SHRM supports enacting the resolution "due to concerns regarding the negative impact that state-run retirement plans could have on employers," said Kathleen Coulombe, SHRM senior advisor, government relations. Among these concerns:
If the resolution is enacted, "states would still be free to create state-run retirement plans, but they would need to navigate ERISA requirements in doing so," Coulombe said. "SHRM is engaging in advocacy efforts on this issue to ensure lawmakers are informed of the negative impact on employers."
Others have defended the ERISA-exception for government-run IRAs, noting that these plans would be funded only through employee salary contributions and employers would not be allowed to provide matching contributions.
"IRAs are not generally subject to the rules specific to ERISA-governed, multiparticipant retirement plans, due to their nature as individually funded and controlled savings arrangements that do not permit employer contributions," said Barb Van Zomeren, vice president for ERISA at Ascensus, an independent retirement plan and college savings services provider based in Dresher, Pa.
While Van Zomeren acknowledged that a lack of employer contributions limits the value of these government-run plans, she sees them benefiting employees without access to any other salary deferral savings option. "An IRA-based auto-enrollment retirement plan is an important first step toward a secure retirement," she contended. "The option to establish a more-formal ERISA plan would always remain for employers" that participate in government-run IRA programs.