A lawsuit was filed last week (May 31, 2018) in an attempt to block implementation of a new retirement savings program established by the State of California. The California Secure Choice Retirement Savings Program—recently rename CalSavers—is an IRA-based retirement savings program for that state’s private sector employees whose employers do not offer a workplace retirement plan, which was authorized by legislation enacted in 2016. According to CalSavers, some 7.5 million Californians work for employers that do not offer a retirement plan.
The lawsuit was filed by the Howard Jarvis Taxpayers Association (HJTA) and seeks to prevent introduction of this program projected to launch sometime in 2018. In addition to the program itself, also named as defendant is John Chiang, California State Treasurer and Chair of the California Secure Choice Retirement Savings Board.
HJTA claims to have standing to sue based on the fact that some of its members—claimed in the filing to number more than 200,000—could be affected either as employers required to participate in the payroll withholding program, or employees who might be automatically enrolled. The lawsuit was filed in U.S. District Court for the Eastern District of California.
In a recent video interview with PLANADVISER, Chairman and CEO Bob Guillocheau and President David Musto discuss how state-sponsored retirement programs are actually generating new opportunities for advisors to have consultative conversations with prospective retirement plan sponsors. ”The advisor opportunity is obvious with all of these small firms going through a decision process, in many cases looking for guidance, views, and perspectives across these programs,” notes Musto.
Northern Public Radio recently published an article discussing the pilot phase of Illinois’ State-Sponsored Retirement Program, Secure Choice. Illinois employers with 25 or more workers can offer Secure Choice, which automatically channels five percent of workers’ paychecks into a Roth IRA. “Because everyone knows they need to save for their retirement,” says State Treasurer Mike Frerichs. “We just put if off because it’s too difficult, it’s complicated, it’s confusing, or I can’t put the money aside today. But when we help them take it out of their paycheck, where they don’t have to do anything, they don’t miss the money, most people continue to save. They stay in the program.”
In a recent article published by MarketWatch, SVP Peg Creonte discusses the value of the OregonSaves retirement program. As multiple states such as New York continue to take steps to create state-sponsored retirement savings plans, they look at Oregon as an example on how to structure new programs. Creonte highlights that although many people have the opportunity to open a Roth IRA, they do not take action. She also notes that ,”What really drives [OregonSaves] is the auto-enrollment feature.”
The ERISA Industry Committee (ERIC), a trade group that describes itself as representing large employers on health and retirement issues, has settled a lawsuit filed in October 2017 against the Oregon Retirement Savings Board.
ERIC had charged that OregonSaves—a retirement program for private sector workers with no workplace plan—conflicts with the Employee Retirement Income Security Act of 1974 (ERISA), and therefore OregonSaves requirements are preempted by that federal law. The lawsuit was filed in U.S. District Court for the District of Oregon.
OregonSaves requires most employers offering no retirement plan to enroll employees in its payroll withholding Roth IRA savings program. In order to be exempt from participating, employers that sponsor a plan must communicate this to the program. ERIC contended that this information-sharing requirement places a burden on employers that violates ERISA, and therefore, under preemption principles, the requirement should not be enforced.
The lawsuit did not proceed to the point where the Court ruled on the OregonSaves employer exemption procedure, which requires an employer to indicate online that it has a retirement plan, and the plan type.
Under the terms of the settlement, Oregon employers seeking exemption may inform OregonSaves of their ERIC member status, which can then be confirmed with ERIC. (No alternative procedure is provided under this settlement for Oregon employers that sponsor a retirement plan and are not ERIC members.)
ERIC has indicated at its website that it intends to work with regulators in hopes of finding an alternate means of providing information on plan sponsorship, whether to OregonSaves or to other state-sponsored programs seeking similar information.
An amendment to New York’s state finance law has established an IRA-based retirement savings program for the state’s private sector employers and their employees. Full establishment of the program is envisioned within 24 months.
The New York State Secure Choice Savings Program is to be a Roth IRA-based program that complies with Internal Revenue Code requirements for Roth IRAs. The program is to cover employees age 18 or older who have compensation from an employer (either for-profit or nonprofit) engaged in an enterprise in the state of New York, an employer that has not offered a “qualified retirement plan” within the two prior years. “Plan” is to include such traditional qualified plans as profit sharing/401(k), money purchase, target benefit, and defined benefit plans, as well as 403(b), SEP, and SIMPLE IRA plans, and governmental 457(b) plans.
Employees will be offered an opportunity to contribute or to decline participation. If no election is made, employees would be automatically enrolled and contributions withheld from their compensation at a rate of three percent. Employees can opt out of participation at any time or may change their rate of contribution. Other provisions of the program as identified in the state’s finance law amendment include the following.
- A governing Board is to choose available investments, with an initial default investment proposed to be a life-cycle or target date fund; future options to potentially include principal protection, growth, and “secure return” investment options.
- Investments are to be pooled to take advantage of cost savings “through efficiencies and economies of scale.”
- The Board would set minimum and maximum contributions consistent with Roth IRA rules, as well as determine withdrawal provisions.
- Employers participating in the program will “begin employee enrollment at most nine months after the Board opens the program for enrollment.”
- A website is to be established to provide information and enable participant transactions.
- Communications with employees will be provided in eight specified languages, and others as “the state comptroller deems necessary.”
- Deposits of amounts withheld from employee pay are to occur no later than the last day of the month following the month of withholding, and consistent also with an employer’s deposit requirements for income tax and unemployment insurance withholding.
- There would be no New York state funding obligation or liability.
- Employers would not be liable for employee participation decisions or governing board decisions.
The program’s governing board may delay implementation beyond the anticipated 24-month period if adequate funds to administer the program are not obtained. Funds for such administration can come from state, federal, or local government sources, as well as any individual, firm, partnership, or corporation.
President Trump signed House Joint Resolution (H.J. Res.) 66, a resolution of disapproval under the Congressional Review Act that nullifies 2016 Department of Labor (DOL) final regulations that granted states a regulatory safe harbor for automatic enrollment IRA savings programs. Several states, including Oregon, Illinois, California, Connecticut, and Maryland, are in the process of establishing such programs for employees of certain private sector employers that do not offer another type of retirement plan. More than half the states are at some stage of examining state-coordinated savings programs for their private sector workers. These final regulations were written to grant assurance to employers (and state governments) that participation in such programs would not be viewed as establishing an employee benefit plan subject to the conditions imposed by the Employee Retirement Income Security Act (ERISA).
These now-revoked regulations were issued in proposed form in 2015, and finalized in August 2016. Because of the timing of their release in final form near the end of the Obama administration, they were subject to revocation under the Congressional Review Act by majority vote of both U.S. Senate and House of Representatives, and signature by the President. On May 3, 2017, the Senate voted 50-49 to disapprove these regulations, following an earlier disapproval vote by the House. As a consequence of this action by House and Senate and signature by President Trump, no regulations substantially similar in nature may be issued by the DOL. (Similar regulations that granted large municipalities a safe harbor to establish IRA-based savings programs for private sector workers were the subject of an earlier resolution of disapproval and revocation, under H.J. Res. 67.)
Following disapproval of these regulations, states that have established such IRA-based programs—and those considering them—must now evaluate the extent to which the absence of the 2016 DOL safe harbor may influence their implementation. Several states have indicated that they will proceed without the clarifications of this safe harbor, relying instead on other guidance for any necessary exemptions.
In response to a Senate vote passing the resolution to disapprove Department of Labor (DOL) regulations pertaining to IRA-based retirement savings programs established by states, Senators Martin Heinrich (D-NM) and Chris Murphy (D-CT), along with 16 other Democratic cosponsors, have introduced the Preserve Rights of States and Political Subdivisions to Encourage Retirement Savings (PROSPERS) Act. The Act, if passed, will amend Section 3 of the Employee Retirement Income Security Act (ERISA) of 1974 to exclude individual retirement plans (i.e., individual retirement accounts and individual retirement annuities, as defined under Internal Revenue Code Sections 408(a) and 408(b)) from the definition of “employee pension benefit plan” and “pension plan” under ERISA, provided certain conditions are met. To be exempt from the “employee pension benefit plan” and “pension plan” definitions under ERISA, the Act requires individual retirement annuity and individual retirement account-based plans that are run by states or qualified political subdivisions to
- be established under state or qualified political subdivision law;
- be implemented and administered by the state or qualified political subdivision;
- require that the qualified political subdivision’s state be responsible for the security of payroll deductions, including their prompt deposit by the “earliest date on which such contributions can reasonably be segregated from the employer’s general assets”;
- require that the state or qualified political subdivision provide notice to employees of their rights under the program;
- provide that participation is voluntary for employees;
- limit the enforceability of the rights of employees, former employees, and beneficiaries to only employees, former employees, beneficiaries, authorized representatives, or the state or qualified political subdivision;
- limit employer involvement to collecting employee contributions through payroll deduction, providing notices to employees and maintaining records, providing information necessary to facilitate the operation of the program, and distributing information or publicizing the program to employees;
- not allow for employer contributions;
- require that the employer has no discretionary authority, control, or responsibility under the program; and
- require that the employer receive no direct or indirect consideration (cash or otherwise), including tax incentives or credits, that does not exceed the employer’s costs under the program.
The Act as written also allows for such programs to be directed toward employers who do not offer other workplace savings arrangements, use service or investment providers to operate and administer the program, and allow for auto-enrollment and auto-increase provisions (if employees are given adequate advanced notice), without violating the above requirements. Program eligibility would not extend to political subdivisions with populations fewer than that of the least populated state or those which overlap with any other political subdivision.
The progress of the bill will continue to be closely monitored, and updates with be provided as warranted.
The U.S. Senate voted 50–49 to disapprove—and therefore withdraw—Department of Labor (DOL) regulations pertaining to IRA-based retirement savings programs established by states.
Under the procedures of the Congressional Review Act, the Senate voted in favor of a Resolution of Disapproval for these DOL regulations, following a similar disapproval in the House of Representatives. If signed by President Trump, these regulations are not only withdrawn, but may not be proposed in the future in substantially similar form.
The regulations were first proposed in 2015 and finalized in 2016, granting a safe harbor to states that might establish voluntary or mandatory IRA-based savings programs for certain private sector employers within their borders that do not offer another retirement plan. The safe harbor was intended to provide assurance to employers and state governments that the IRA-based savings programs they might establish would not be brought under, or found to violate the terms of, the Employee Retirement Income Security Act (ERISA). ERISA governs employer-sponsored qualified retirement plans—those multi-participant plans that generally must meet stringent nondiscrimination, contribution, and other requirements. Under the now withdrawn regulations, these requirements would have been inapplicable to state-sponsored IRA programs if certain conditions were met.
Following disapproval of these regulations, states that have established such IRA-based programs—and those considering them—must now evaluate the extent to which the absence of a DOL safe harbor will influence their implementation.
More than half of the states have already passed enabling legislation or are considering legislation to put IRA-based retirement savings programs in place. Many states have announced that they will proceed without the protections of the 2016 safe harbor, relying instead on previous guidance for any necessary exemptions.
The U.S. Senate today voted 50-49 to disapprove and thereby withdraw the DOL final regulations that granted an ERISA safe harbor for payroll withholding IRA savings plans established by municipalities for private sector workers. This disapproval was first passed in the House of Representatives, and then referred to the Senate. It must also be signed by President Trump in order to take effect, but his signature is considered a foregone conclusion.
Still pending in the Senate is a companion Resolution of Disapproval for the statewide IRA savings program regulations. That Resolution was previously passed in the Republican-controlled House on an essentially party-line vote. It is unclear at this time when, or if, the Senate will consider and vote on whether to disapprove these regulations for state-wide retirement programs. There is speculation that if the Senate does act on this Resolution of Disapproval, it might not do so until after Congress’ April recess and therefore, not until mid-April.
Such action, officially called a “Resolution of Disapproval,” is authorized under the Congressional Review Act, which allows Congress the opportunity to withdraw federal agency-issued regulations if such action is initiated within 60 legislative days after regulations issuance.
These now-disapproved regulations were intended to assure qualifying large municipalities, such as New York City, Philadelphia, etc., that IRA-based savings programs they establish for private sector workers within their jurisdictions would not be subject to certain requirements of the Employee Retirement Income Security Act (ERISA). Such programs would instead be subject to the Internal Revenue Code provisions and protections already in place for IRAs.
The DOL in December, 2016, added these municipality-specific regulations to earlier regulations granting states the same ERISA safe harbor for IRA-based savings plans. Several states, including Oregon, Illinois, and California, are well along in implementing such programs for private sector workers who have no employment-based retirement plan. More than half the states have either passed enabling legislation, or are actively considering it.