by Daniel Desrochers
Department of Labor Rule Clears the Way for State Sponsored Retirement Plan for Private Sector Workers
A new federal Department of Labor (DOL) rule clears the way for states to offer a particular model of retirement plan for private sector workers without it being subject to regulation under the federal Employee Retirement Income Security Act of 1972 (ERISA). We previously described how too many Kentuckians are underprepared for retirement — with hundreds of thousands of private sector workers not having access to a retirement plan through their employer, particularly those working for small businesses. The new DOL rule provides a great opportunity for states like Kentucky to sponsor a retirement plan that would not only benefit these workers and the state as a whole, but would help small businesses compete for qualified workers.
The new DOL rule provides a safe harbor from ERISA for retirement plans that are state sponsored as long as they require the participation of nearly all businesses that do not already offer their employees a plan and automatically enroll employees unless they opt out. ERISA provides important consumer protections but also requires businesses to take on fiduciary and reporting responsibilities that some employers find intimidating. Such liabilities and reporting would not be required of businesses under state sponsored retirement plans that qualify for the new safe harbor.
Here are some of the implications of the new DOL rule for Kentucky:
The new rule points to the type of state sponsored retirement plan for private sector workers Kentucky should pursue — the basic model already being followed in Illinois, California, Oregon, Connecticut and Maryland and that was previously proposed in Kentucky. This model is sometimes referred to as a non-ERISA auto-IRA (Individual Retirement Account) plan. While there are other ways for states to try to encourage retirement plan participation — for instance, those being implemented in New Jersey, Washington state and Massachusetts, discussed below — they do not qualify for the ERISA safe harbor. Kentucky should opt for a non-ERISA auto-IRA plan in order to avoid being subject to ERISA and because such a model has the best chance of making a significant impact on improving retirement security in the state.
In the non-ERISA auto-IRA model, most businesses that do not already offer a retirement plan (such as those that are typically above a certain size, i.e. more than five employees) set up an automatic payroll deduction to the state sponsored plan for any of their employees that do not opt out. This enrollment process is simple and the fees are low for employees. New Jersey and Washington state are instead creating an insurance marketplace with private sector plans businesses can choose to offer their employees — and Massachusetts is implementing a state sponsored option for small nonprofits — but these plans do not qualify for the new DOL rule that provides a safe harbor from ERISA and are unlikely to help nearly as many workers.
It’s beneficial to businesses for a plan to be exempt from ERISA. ERISA provides important consumer protections, but it prevents many employers from offering a retirement plan to their workers. ERISA requires the employer to take on certain financial liabilities and to engage in extensive reporting to the federal government. With a non-ERISA auto-IRA state plan, which falls under the new ERISA safe harbor created by the DOL rule, employees that do not already have access to a plan at work can begin investing in their retirement without their employers having to take on such responsibilities.
There are additional benefits of such a state plan for employers. It helps level the playing field for small businesses in hiring and retaining workers as larger firms are more likely to already offer retirement plans. A state non-ERISA auto-IRA plan also removes barriers that often keep some employers from offering retirement plans. In addition to the liability and reporting required by ERISA, many employers want to offer plans but are overwhelmed with options and costs.
A state can only take advantage of the benefits of the new ERISA safe harbor if their plan’s design requires most employers to participate and allows employees to opt out. It is important to note the requirement for most employers that do not already offer a retirement plan to participate is also what makes it possible for the plans to have low fees for participating employees and be self-sustaining (after initial relatively small start-up costs for the state). Additionally, no employer is actually required to participate as they are free to offer their own retirement plan to their employees (only employers who do not offer a retirement plan to their workers would be participating in the state sponsored plan).
There isn’t really a downside for employers. AARP has done research on how little is involved in setting up the new payroll deduction. Also, if there are any costs, the new DOL rule allows a state to reimburse businesses — i.e., through a small tax credit. Also, as pointed out recently by the Republican former State Treasurer of Indiana Richard Mourdock, it’s not unlike other requirements for employers and it should be very easy for affected employers to comply.
Employees have a choice. In the model of a state sponsored retirement at hand, employees are automatically enrolled in the retirement plan in order to promote participation. However, they are free to opt out.
In addition to these benefits to private sector employees and businesses, a state sponsored retirement plan for private sector workers would be good for the state in costs avoided for seniors who end up living in poverty. An analysis of retirement in Utah found that if 1/3 of the state’s least prepared for retirement saved an additional $14,000 over their entire career there would be a decrease in the need for government programs by about $194 million through 2030. And as mentioned previously, after initial relatively small start-up costs the plan would be self-sustaining for the state through minor fees paid out of the balances of those workers participating.
Data released today by the U.S. Department of Education shows Kentuckians leaving college with student loan debt are among the most likely to default nationwide. The state’s new default rate of 15.5 percent is down from last year’s 16.3 percent, but Kentucky continues to have the 3rd-highest student loan default rate in the nation (behind New Mexico and West Virginia); the national default rate is 11.3 percent, down just slightly from 11.8 percent last year. This new default rate data underscores the college affordability problems in our state, particularly for low-income students.
The newly released three-year default rate is a calculation of the share of students whose loans entered repayment in 2013 who, within three years, missed payments for at least nine months consecutively.
Kentucky’s high student loan default rate gives important insight into the struggles of students who often have relatively small amounts of student debt but who cannot repay given their low incomes; this is despite Kentucky’s average student loan amount for college graduates, which has been on the rise, remaining below the national average. As described in a New York Times article on student debt in the U.S. last year:
“Defaults are concentrated among the millions of students who drop out without a degree, and they tend to have smaller debts. That is where the serious problem with student debt is. Students who attended a two- or four-year college without earning a degree are struggling to find well-paying work to pay off the debt they accumulated.”
According to the article, the average balance of a borrower in the Direct Loan program, the source of all federal loans for college students since 2010, is $15,000 — and 51 percent of defaulters left college with less than $10,000 in student loans. Often these are students who left college (many for financial reasons) without earning a degree, which impacts earnings and ability to repay. Below is a graph from the NYT article that highlights these issues:
Source: Susan Dynarski, “Why Students With Smallest Debts Have the Larger Problem,” The New York Times, August 31, 2015.
As we’ve noted previously, here and here, low-income college students in Kentucky have much lower graduation rates, and the state has made little to no progress in closing these achievement gaps. Student loan default rates are higher at community colleges and for-profit institutions, where more low-income students enroll. Nationally, the student loan default rates at 4-year public institutions is 7.3 percent, while the default rate at 2- to 3-year public colleges is 18.5 percent; the default rate at 2- to 3-year for-profit schools is 16.8 percent and for 4-year for-profit schools is 14.0 percent (private 4-year colleges have just a 6.5 percent default rate).
Below are the new student loan default rates for Kentucky’s public 4-year universities, which range from 4.4 percent to 17.6 percent, and 2-year community colleges, which range from 21.0 percent to 30.2 percent.
Source: Department of Education.
Source: Department of Education.
As we’ve described before, despite the relatively low tuition and fees at schools in the Kentucky Community and Technical College System the costs of attending are too high for many, and recipients of federal need-based Pell grants are more likely than others to take out student loans and to owe more. In addition, low-income Kentucky community college students in particular face many barriers to college completion.
Kentucky’s high student loan default rates underscore the need for the state to restore funding for its public universities and community colleges in order to make tuition more affordable for students and promote investment in student supports such as intensive advising, as well as the need to provide more students access to state need-based financial aid.
Corrections Data Shows Positive Impact of HB 463 That Additional Criminal Justice Reforms Can Build On
The impact of Kentucky’s 2011 criminal justice reforms on the state’s inmate population and budget have been much less than what was projected when Kentucky enacted HB 463, or the “Public Safety and Offender Accountability Act.” In fact, the state’s inmate population is now higher than it was in 2011, and the rate of inmates returning to prison after release — “recidivism” — is on the rise. However, new Department of Corrections (DOC) data shows that there have been some successes with HB 463, which should be built on with additional criminal justice reforms in 2017.
Source: Department of Corrections Data.
What HB 463 Did
According to the DOC’s presentation at the most recent Criminal Justice Policy Assessment Council (CJPAC) meeting, HB 463 has resulted in fewer inmates than would otherwise be the case, some savings to the state and better access to substance abuse treatment and programs that help reduce recidivism.
Mandatory Reentry Supervision
HB 463 instituted a Mandatory Reentry Supervision policy requiring every inmate to undergo a period of supervision by probation and parole staff after release. This component was included in HB 463 based on research showing the period immediately after release from prison is critical in reducing recidivism. Inmates not granted parole are either released under supervision six months prior to the end of their sentences or serve an additional year of supervision after the end of their prison term. According to the DOC, as of June 2016 Mandatory Reentry Supervision has resulted in cost savings of more than $81 million because of the shortened length of sentences resulting from the policy.
Drug Law Changes
HB 463 also reduced charges (and therefore sentences) for lower level drug crimes, limiting longer prison terms to those with substantial quantities of drugs to indicate trafficking.
As a result, as seen in the graph below, a smaller share of drug convictions are tagged with Persistent Felony Offender (PFO) sentence enhancement, which increases the charge and associated sentence for those who have previously been in the criminal justice system; for instance, with a PFO 2nd Degree sentence enhancement for a Class D felony (a 1 to 5 year sentence) the charge becomes a Class C felony (5 to 10 year sentence).
According to the DOC, the overall sentence length of drug convictions has decreased an average of about 400 days since before HB 463, as seen in the graph below.
2011’s reforms also made changes so that fewer Kentuckians on probation or parole would be sent to jail or back to prison for minor, technical violations such as missing an appointment with a probation/parole officer or missing curfew. A system of accountability measures, corrective actions and programs is in place prior to probation or parole being revoked — such as more intensive supervision, community service, random drug testing or a short amount of time in jail. HB 463 has increased the use of such graduated sanctions, but much more is needed.
While HB 463 required the DOC to put in place a system of graduated sanctions, it did not require that this system be followed. As noted by the Department of Public Advocacy, “A court that does not agree with graduated sanctions could revoke at the first opportunity despite the recommendation of a lesser sanction by a probation officer.” And these graduated sanctions are often not being followed. According to a presentation by Pew Charitable Trusts at the CJPAC meeting, two-thirds of prison admissions are the result of supervision violations, as seen in a slide from this presentation shown below.
Source: The Pew Charitable Trusts, Presentation at September 15, 2016 CJPAC meeting.
Substance Abuse Treatment
Another important change made by HB 463 was expanded access to substance abuse treatment during and after incarceration. The 2015 Kentucky Treatment Outcomes Study (CJKTOS) reports that the number of corrections-based substance abuse treatment slots (in jails, prisons and in the community) went from 2,289 in 2011 to 3,563 in 2015. According to the DOC’s presentation at the most recent CJPAC meeting, HB 463 has established 1,400 Community Substance Abuse Program beds, enabling treatment to be completed out of jail or prison.
With HB 463, the focus of DOC programming shifted to treatment and intervention approaches that have been shown to be effective in reducing recidivism. Kentucky DOC data shows that inmates participating in these “evidence-based programs” such as adult education, vocational training, substance abuse treatment and behavioral change programs — and particularly those that completed them — are indeed less likely to recidivate.
Additional Reforms Needed in 2017
The new DOC data on the impact of HB 463 shows it resulted in some improvements in the state’s criminal justice system, without which the inmate population would be even higher. However, the data on the prison population and recidivism rates point to the need for additional reforms — for instance, Representative Yonts’s proposed legislation that would address the state’s low parole rates and also make it more difficult for probation and parole to be revoked, among other changes. Additional important reform options can be found here.
by Jason Bailey
by Lexington Herald-Leader