After five states passed legislation to automatically enroll many private-sector employees in state-sponsored individual retirement accounts (IRAs), Congress just voted to upend these programs before states could launch them.
More than 30 million U.S. workers report that they do not have access to an employer-based retirement plan, according to a Pew Charitable Trusts analysis. Overall, Pew found that only 58 percent of U.S. workers had access to such a plan. Employers — particularly small businesses — face multiple challenges to offering their employees a retirement plan. As a result, only 70 percent of small businesses, and nearly a third of U.S. firms overall, do not offer employees a retirement plan.
In an attempt to narrow this coverage gap, we've written in the past about one solution states have proposed to “nudge” small business workers toward enrolling in state-run retirement programs.
Resolution Repeals Obama-Era Regulations
California, Illinois, Maryland, Oregon, and Connecticut have all passed legislation to automatically enroll business employees in state-sponsored IRAs if the businesses don't already offer retirement benefits (legislative background available here).
Under the Obama Administration, the U.S. Department of Labor (DOL) issued a final rule and guidelines to eliminate potential federal obstacles to states that seek to implement their own IRA programs. Particularly, the DOL guidance would exempt state programs from the Employee Retirement Income Security Act (ERISA) — a federal law that preempts most state laws relating to employee benefit plans — as long as certain conditions are met.
ERISA preemption remained a big question mark for states contemplating their own programs, and the DOL guidance was intended to assuage many of those concerns. Additionally, DOL clarified that fiduciary responsibility for such plans falls to the state, not employers. The congressional action this week will repeal these regulations, putting state programs back in legal limbo.
Congress Votes to Upend State Retirement Programs
This year the Republican-controlled U.S. Congress took aim to block the state-run, auto-enroll IRA programs. In February, the U.S. House of Representatives passed a resolution (H.J. Res. 66), per the Congressional Review Act (CRA), by a vote of 231-193 to overturn the rule. The U.S. Senate delayed a vote while opponents of the state programs convinced senators to support the resolution. And yesterday, with only days remaining in the window to utilize the CRA process, the Senate voted 50 - 49 in favor of the resolution to upend the state programs. President Trump is expected to sign the resolution and officially repeal the Obama-era regulations.
Congressional opponents of state-run, auto-enroll IRA programs urged support for repealing the rule. “Our nation faces difficult retirement challenges, but more government isn’t the solution,” Rep. Tim Walberg (R-MI) said in a statement. Another supporter of the rule's repeal, Rep. Francis Rooney (R-FL), argued that, “Employers will face a confusing patchwork of rules, and many small businesses may forgo offering retirement plans altogether. Congress must act to protect workers and small businesses from these misguided regulations."
In a February 13 letter, the National Conference of State Legislatures (NCSL) urged Congress not to repeal the DOL rule allowing state-run IRA programs to move forward. NCSL noted:
“As the number of workers who lack enough savings to cover the costs of retirement expenses continues to grow, states need the flexibility to develop creative solutions to this problem. Restricting the ability of states to establish private sector savings plans will put an even greater strain on public finances because states and the federal government are ultimately responsible for funding the social safety programs that are utilized by retirees who are not financially independent.”
Legality Unclear as States Vow to Implement Programs
California lawmakers have already vowed to move forward with the state's program even after Congress repeals the federal regulations, guaranteeing the issue will end up in court. Regardless of the legal battles over state auto-enroll IRA accounts, states will continue to explore avenues further encouraging workers to save for retirement.
However, until the legal uncertainty surrounding state auto-enroll IRA programs are resolved, states that were debating starting their own auto-enroll IRA programs will likely pause the discussion and wait to see the fate of similar programs in California, Illinois, Maryland, Oregon, and Connecticut.