Family Finances

Secure Choice States Get Final Go-Ahead from Obama Administration

September 7, 2016  • David Mitchell & Financial Security Program

The Federal Register can be dense reading, but a handful of pages included in last Tuesday’s edition could help states remake the country’s retirement system. In a much-anticipated final rule, the Department of Labor (DOL) has given a green light to the growing number of states – both red and blue – interested in pursuing their own retirement initiatives.

At issue was a federal statute called the Employee Retirement Income Security Act, also known as ERISA, which was passed in 1974 to ensure employer-sponsored pension plans are soundly managed. As regular readers of this blog know, a number of states are pursuing plans that would automatically enroll private sector workers who are not offered an employer-based 401(k) into a state-run individual retirement account (IRA). These states are worried that the new system could be deemed an employer-sponsored plan subject to ERISA, which would burden small businesses with lots of red tape. But the whole point of these state plans – often called auto-IRAs or Secure Choice – is to provide a new coverage option for small business employees while taking the onus off of their employers, asking only that they enroll their workers via a payroll deduction into the state plan. As such, avoiding ERISA is much more than an arcane legal issue for these states, but rather a lynchpin for getting the programs off the ground.

The question may ultimately be decided by the courts, but DOL’s opinion on the matter holds a lot of sway, and last week the agency affirmed that, as long as the plans conform with some simple standards, they will qualify for a regulatory safe harbor outside of ERISA.

The ruling not only provides legal certainty to states already pursuing Secure Choice plans, but also sends a powerful, positive signal to other states thinking about launching their own plans but currently on the sidelines.

The final rule also clarified a number of vital implementation issues, including whether states can delegate key plan design decisions to government boards or agencies (they can) and whether very small employers who are exempted from the state programs can still automatically enroll their workers if they wish (they can’t). For a more detailed analysis of the final rule – and a comparison with an earlier DOL Interpretive Bulletin on other ways states can expand retirement coverage to their citizens – see our updated issue brief here.

Interestingly, in a separate, proposed rule also published last Tuesday, DOL opened the possibility that certain state political subdivisions like cities and counties could sponsor their own auto-IRA plans as well, an issue Aspen FSP has written about before. New York City, Philadelphia, and Seattle have recently voiced interest – and DOL seems poised to give them approval, though the agency is first soliciting public comment to help determine exactly which local governments should qualify. The current proposal’s criteria centers around the population of the jurisdiction, setting a threshold of the least populous state (currently Wyoming at 586,107). The comment period closes on September 29, so all those interested – especially any jurisdictions interested in pursuing their own plan but falling short of this minimum – should make their voices heard by then.