Final Department of Labor (DOL) regulations have opened the way for the largest expansion of retirement plan coverage in several decades. The regulations provide much-needed guidance to states that want to establish state-sponsored automatic IRA plans for small-business employees. Earlier, DOL provided guidance for state-sponsored multiple employee plans (MEPs) and marketplaces.
About 55 million Americans work for companies that don’t offer them the ability to save for retirement through payroll deduction. Most of these workers are employed by small businesses, and a large proportion is made up of women, minorities and those with lower incomes. The percentage of workers offered a retirement savings plan or pension has not changed for several decades. Faced with growing government costs if people retire with little more than Social Security, many states are considering state-sponsored retirement savings plans for small-business employees. Already, eight states have passed legislation to establish some form of state-sponsored retirement plan.
Flexibility and consumer protections
The final regulations offer states that choose to establish automatic enrollment savings plans that are not covered by the Employee Retirement Income Security Act (ERISA) flexibility in the way they administer and regulate the plans. Several states have taken this approach because they believe ERISA imposes greater costs and regulatory responsibilities on employers. While the plans must be established under state law, boards or commissions may set the details of plan design, and operations may be contracted out to private-sector vendors. However, states must take responsibility for the security of payroll deductions by establishing procedures to ensure that the contributions go to the accounts within a reasonable time period.
The state-sponsored plans may use automatic enrollment if the state requires employers to offer the plan or an equivalent private-sector option and the role of the employer is limited to providing information and collecting deductions. Under automatic enrollment, participation is completely voluntary, but an employee is part of the plan, contributing a preset amount to a certain investment choice, unless the worker decides otherwise. States must set out a consumer’s rights and establish a mechanism to enforce them.
City plans possible
DOL also issued proposed regulations that could allow some cities to start small-business retirement savings plans. The proposal came because New York, Philadelphia and Seattle are exploring such a move. The proposal limits this option to cities that have the ability under state law to require businesses to offer a plan and have a population greater than the smallest-population state. The city must be located in a state that has not already set up a state-sponsored plan. In addition, DOL is considering requiring cities to have demonstrated the ability to operate a payroll deduction savings program.
DOL already had issued an interpretive bulletin allowing states to sponsor ERISA-regulated MEPs provided employers are not required to offer the plan. A MEP is essentially a group 401(k) plan with simplified structure and regulatory requirements on employers. The bulletin also approved state marketplaces where employers can select a prescreened retirement plan that meets certain levels of fees or other requirements.
The final regulations make it clear that states have the legal authority to offer small-business retirement savings plans. As more states do so, millions of more Americans will be able to build retirement security.