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 report. In an attempt to narrow this coverage gap, states have begun exploring ways to offer private-sector workers, particularly small business employees, access to retirement plans in state-run programs, or auto-enroll individual retirement accounts (IRAs).
Under the Obama Administration, the U.S. Department of Labor (DOL) issued a final rule essentially providing states a safe harbor to create state-run auto-enroll IRA programs. Although Congress repealed the DOL guidance this year, it is unclear if auto-enroll IRAs are subject to the regulations stipulated in the Employment Retirement Income Security Act (ERISA), or if these programs are even allowed under the law. But this has not stopped states from pushing forward on their plans.
At the time of the reversal, Illinois, Maryland, Oregon, California, and Connecticut had passed legislation and were in the process of establishing state-mandated auto-enrollment programs. In addition, Seattle has introduced its own city-mandated auto-enroll IRA program.
Oregon has already begun implementing its own state-run IRA, OregonSaves. The state is rolling out the program in six waves by number of employees from November 2017 to 2020. Currently, the second wave includes employers with 50 to 99 employees. Moreover, employers that do offer retirement plans to some or all of their employees are required to file for an exemption from the state and renew the exemption every three years. The programs in Illinois, Maryland, Connecticut, and California are all in formative stages, with roll-outs expected in late 2018 or early 2019.
While most states are concerned with their citizens not saving enough for retirement, not all are turning to the state-run auto-IRA model as a solution. Some states, such as Massachusetts and Vermont, are turning to multiple employer plans, while others, like New Jersey and Washington, are creating reduced-cost marketplaces for employees to set up plans.
The legal questions posed by the repeal of the 2016 DOL guidance are not simply hypothetical, as states are beginning to face legal challenges to their auto-IRA programs. The ERISA Industry Committee (ERIC) brought suit against the Oregon Retirement Savings Board, challenging an OregonSaves component that mandated reporting even from employers that already provided an ERISA plan to employees. The suit was settled in March 2018, when Oregon agreed to exempt ERIC members from reporting requirements. In California, the Howard Jarvis Taxpayers Association filed suit against the state’s treasurer to prevent the program from being implemented, arguing that it is preempted by ERISA. The lawsuit is still pending.
Despite unclear signals from the federal government and legal uncertainty, state action on auto-IRA programs will likely continue in the coming legislative sessions. While they don’t yet have any concrete proposals, Wyoming, Missouri, and Virginia have all enacted bills creating commissions to evaluate the feasibility of an auto-IRA program or other state-backed solution.