DOL Opens the Door for State-Run Retirement Initiatives

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By Michael J. Bologna and Sean Forbes

Nov. 16 — States seeking to require employers to establish “automatic IRAs” and ERISA-compliant 401(k) programs received a green light from the Obama administration with the release of rules designed to relieve concerns that state-directed retirement programs would be preempted by the federal government.

Labor Secretary Thomas E. Perez announced Nov. 16 that his agency had issued a proposed rule establishing a new safe harbor from the Employee Retirement Income Security Act for state-sponsored programs involving automatic payroll deductions for workers to individual retirement accounts. Illinois, California and Oregon have all taken steps to establish such programs.

Perez said the department had also published an interpretive bulletin clarifying that states are authorized to sponsor and administer ERISA-compliant 401(k) plans for a wide range of businesses. The interpretive rule specifies that the state, and not the employer, would function as fiduciary in such retirement saving programs.

Speaking to reporters in Chicago, Perez called states “great laboratories of public policy innovation.” He said that more than two dozen states are currently considering legislation permitting them to establish savings programs aimed at the 68 million American workers without access to an employer-sponsored retirement plan. At the same time, Perez said concerns over potential federal intervention had caused most states to hesitate.

“For too long, states have held back from designing and implementing good ideas in this space because of the specter of ERISA preemption,” Perez said. “Our goal today is to eliminate that deterrent and to unleash the innovation and creativity that exists in this state and in so many states. States belong in the policy-making vanguard, especially on an issue as important as retirement security.”

The two pieces of guidance are in response to White House frustration with Congress's inaction on retirement security issues, Michael P. Kreps, a principal with Groom Law Group Chartered in Washington and previously senior pensions and employment counsel for the Senate Health, Education, Labor and Pensions Committee, told Bloomberg BNA..

“The president has proposed federal automatic IRA legislation for years, but Congress has not acted. Now, the president is using his executive authority to do what he can to achieve the same goal—expanding access to the private retirement system—without Congress,” Kreps said.

President Barack Obama announced in July that the DOL would be developing the rules.

Legal Challenges

Perez acknowledged that states might face legal challenges, despite the Labor Department's clarifications. He noted that the department has had discussions with various constituencies objecting to state participation in the retirement savings arena.

“The safe harbor is not an air-tight guarantee,” he said. “The federal courts are the ultimate arbiter on the question of whether state retirement plans are legal or not. But our proposals would provide states with a road map for minimizing the risk of a lawsuit. We could never eliminate litigation risk. But we believe we can substantially mitigate litigation risk with this regulatory proposal.”

The American Retirement Association wasted no time in criticizing the guidance as creating an anti-competitive environment for retirement plan providers.

Brian H. Graff, chief executive officer of the ARA, said in a statement that the proposed rule and the interpretive bulletin “are misplaced attempts by the Administration to promote coverage by giving marketplace advantages to states as retirement plan providers, with no reasonably apparent policy justification to suggest states are somehow going to do a better job providing retirement plan products. We believe this proposal creates an un-level playing field, and uses regulation to give state-run alternatives an unfair, and unwarranted competitive advantage in the retirement plan marketplace.”

The Financial Services Institute, which represents independent broker-dealers and financial advisers, has previously sought to halt states from developing automatic enrollment retirement savings programs. FSI has asserted consumers would be better served by consulting with accredited financial advisers.

The Securities Industry and Financial Markets Association has also been critical of the initiatives out of concerns that they would be anti-competitive with private-sector providers.

Perez expressed confidence federal judges would sustain the two guidance initiatives, saying that for 40 years, the courts have deferred to the Labor Department on rulemakings under ERISA.

No More ‘Boogeymen.'

Joshua Gotbaum, an economics scholar at the Brookings Institution and former director of the Pension Benefit Guaranty Corporation, said the announcement was a game-changer for states worried for years about two potential “boogeymen”: whether state-operated automatic enrollment programs would be preempted and whether employers would be subject to ERISA fiduciary obligations. With both questions apparently answered, Gotbaum said dozens of states would follow the lead of Illinois, California and Oregon.

“This is really important because the Department of Labor estimates there are just under 70 million with private-sector jobs, but no retirement savings plans,” Gotbaum told Bloomberg BNA in an interview. “So if the states tell employers they have to open up their payrolls, 70 million people will save for retirement unless they opt out. The British government has done something similar, and the opt-out rate is something like 10 percent.”

Illinois State Treasurer Michael W. Frerichs, appearing together with Perez, said the announcement relieves his state from uncertainties expressed by many in the retirement community when the Illinois Secure Choice Savings Program Act (Illinois Public Act 098-1150) was being debated by the Illinois General Assembly late last year. Lawmakers ultimately injected provisions barring Illinois from implementing the program if it failed to obtain favorable rulings from the federal government on the ERISA preemption question.

“We could not get up and running without this proposed regulation today,” he said.

Frerichs added that the Labor Department’s proposed rule would validate the key features of the Illinois Secure Choice program, which is expected to benefit 1.2 million Illinois workers. He specifically pointed to federal support for automatic enrollment with freedom for workers to opt out at any time, required participation for certain employers and a default investment option.

Illinois state Sen. Daniel Biss (D), who sponsored the legislation behind the Secure Choice program, praised the DOL for its guidance. “I'm gratified that this guidance indicates their agreement with our view that the Illinois Secure Choice plan ought to be able to move forward outside the scope of ERISA,” he said. “Beyond that, I'm especially grateful that DOL is so actively engaged in this issue, and they they've sought to maximize flexibility for states that are seeking to expand access to retirement savings options, while continuing to pay special attention to consumer protections.”

California Program

California Senate President Pro Tempore Kevin de León (D), who authored his state's law, said Perez’s announcement clears the way for California's Secure Choice program to go forward.

“We’ve been partnering with the administration for several years to clear any potential legal roadblocks to implementing Secure Choice,” and “today’s announcement proves our work has really paid off and California along with many other states will now move forward to help more people enjoy a more dignified retirement,” de León said in a news release.

California’s private-sector retirement savings program could be available to 6.3 million residents in lower and middle-income jobs, de León said.

California officials asked the DOL for guidance on the application of ERISA to its program more than two years ago because it can launch only if it doesn’t trigger ERISA and the fiduciary responsibilities that could fall to employers. The DOL announcement could clear the way for the Secure Choice Investment Board to go to the California legislature as early as 2016 to win approval of a bill to authorize operation of the program. Since 2012, the board has been researching the program’s feasibility while awaiting federal guidance.

Comments on the DOL's proposed rule are due by Jan. 19. The proposed rule (RIN 1210-AB71) and interpretive bulletin (RIN 1210-AB74) are scheduled to be published in the Federal Register on Nov. 18. The bulletin is effective Nov. 18.

—With assistance from Laura Mahoney in Sacramento, Calif.

To contact the reporter on this story: Michael J. Bologna in Chicago at

To contact the editors responsible for this story: Phil Kushin at; Jo-el J. Meyer at

Text of the proposed rule is at Text of the interpretive bulletin is at A copy of a DOL fact sheet on the guidance is at