What Are State-Sponsored Payroll Deduction IRA Plans?
Generally, these are state-sponsored IRAs that are intended to help workers save for retirement. A state authorizing such a plan may require that private-sector businesses that don't sponsor a retirement savings plan provide their workers with access to a state-administered payroll-deduction IRA plan. Employees are auto-enrolled in the plan, but have the ability to opt out.
According to the U.S. Department of Labor, one-third of the nation's workers don't have access to retirement savings plans through their employers. And even though these employees could establish their own IRAs, most do not.1 Concerned that inadequate retirement savings could stress their social programs, some states are turning to the payroll deduction IRA plan as one possible way to address the problem.
At least eight states have enacted legislation enabling these (or similar) plans, and many others have legislation pending. Adoption has been slow because of significant legal uncertainties.2
In particular, states are concerned that the Employee Retirement Income Security Act of 1974 (ERISA) could apply to these plans, rendering them too complicated and burdensome to operate, and placing fiduciary responsibility on the state and/or its participating employers.
Department of Labor to the rescue (temporarily)...
States thought these concerns were alleviated at the end of 2016 when the Department of Labor issued final regulations that provided a roadmap of how these plans could be structured to avoid ERISA coverage:
- Employee participation in the program must
be voluntary. If the program requires automatic enrollment, employees must be given adequate advance notice and have the right to opt out.
- The employer's activities must be
limited to ministerial activities such as collecting payroll deductions and remitting them to the program.
- Employers cannot contribute employer funds to the IRAs.
- Employer participation in the program must be required by state law.
- The state must be responsible for investing the employee savings or for selecting investment alternatives from which employees may choose.
- The state or its governmental agency or instrumentality may also contract with others to operate and administer the program.
Only to fall victim to regulatory review...
This relief was, however, short-lived. Several members of Congress objected to allowing states to invest employees' retirement funds without ERISA protections, and questioned the ability of states to run retirement programs for private-sector employees. Other critics saw no need for the state programs to be competing with the private sector, which already provides low-cost IRAs. Still others objected to a state-by-state approach for what is perceived to be a national retirement savings problem.
For these and a number of other reasons, pursuant to the Congressional Review Act, the House and Senate passed Joint Resolution 66 to "disapprove" the regulations. President Trump signed the resolution on May 17, 2017, repealing the Obama-era regulations and leaving the states once again without any formal guidance.
The road ahead
Despite this setback, a number of states have indicated their intent to push ahead with their payroll deduction IRA plans.
In July 2017, Oregon launched its pilot program, OregonSaves, and is phasing in coverage. California has also vowed to move ahead with its plan, Secure Choice: "We will continue to implement and defend our Secure Choice retirement savings program so Californians who have worked hard all their lives can retire at a reasonable age with a measure of dignity." 3
New Mexico Senator Martin Heinrich and Connecticut Senator Chris Murphy have also introduced legislation (the Preserve Rights of States and Political Subdivisions to Encourage Retirement Savings, or PROSPERS Act) that, if passed, would effectively amend ERISA to incorporate the substance of the repealed DOL regulations.
1 U.S. Department of Labor, EBSA News Release August 25, 2016