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.
