On Wednesday, the Senate narrowly voted to overturn a Department of Labor (DOL) policy that would help states offer retirement savings plans. The policy had created a safe harbor that essentially would have exempted states from complying with ERISA rules and requirements. It is widely accepted that President Trump will sign the repeal measure.
While states can still offer these retirement plans—and at least seven have already passed legislation to do so—their options appear to have gotten a little more complex.
The state retirement plan rule has clearly been divisive—the Senate vote was 50-49 to overturn the rule. Most would agree, however, that offering retirement plans to the estimated 55 million Americans who don’t have access to workplace plans would be a good thing. But some opposed to state-run retirement plans argue that these types of plans should be handled by the private sector rather than the government.
Here’s an argument you might not have expected: The AARP, which is a proponent of state-run retirement plans, published a paper in February suggesting state-run retirement plans would be a boon for the private sector because small business owners don’t want to participate in them.
Yes, you read that sentence correctly. The article, Facts and Fallacy about State-Facilitated Retirement Savings Plans, stated,
“Fact: State-facilitated plans are a huge opportunity for the private sector. Half of small businesses required to join a state-facilitated retirement savings plan would start their own private retirement plan instead. Financial advisors are starting to recognize this potential business opportunity.”
It’s true. A 2017 Pew Research survey explored the reasons small and mid-sized businesses do not sponsor qualified plans, and asked business owners about the policy initiatives states have been considering to help more Americans save for retirement.
Two-thirds of the business owners surveyed indicated they would be unlikely to sponsor a retirement plan during the next two years unless circumstances changed. Changes that would persuade them to think differently included:
- The company becoming more profitable
- The company receiving more tax credits for starting a plan
- Qualified retirement plans having fewer administrative requirements
The kicker was that 51% of business owners would start their own plans – accepting the increased costs and the headaches associated with plan administration – if their states require them to offer retirement plans.
Once President Trump signs the repeal measure—and it is expected he will—states will still be able to set up their own retirement plans, as long as they comply with ERISA rules. Options could include:
- ERISA Plans or Multiple employer plans (MEPs). States can choose to establish ERISA-governed plans that include non-government employers. In general, small businesses prototype plans and MEPs benefit from economies of scale and reduced fiduciary responsibility. In addition, the state would be the fiduciary, operate the plan, communicate with employees, select service providers, pay benefits, and perform other services.
Worth noting: Many trade associations and professional organizations currently offer MEPs for small businesses and sole proprietors.
- Online marketplace exchanges. State exchanges are intended to encourage small businesses to adopt private sector plans. Pew explained, “States can create websites where financial service providers can market retirement plans. States can set criteria for providers, who can present their plans in formats that allow for easy comparison shopping. Employers could receive tax breaks or other incentives to adopt a plan, and employees could receive similar incentives to participate.”
Worth noting: Businesses of all sizes have access to plan providers, financial advisors, consultants, and other professionals who can help them review retirement plan options and set up a plan.
It’s worth noting that business owners didn’t object to auto-IRA plans – 86% of employers without plans strongly supported or somewhat supported the concept of an IRA with automatic enrollment and deductions. But they objected to the plans being run by the government, according to the Pew study.
Congress and the new administration have proven to have about as much enthusiasm for state governments organizing retirement savings accounts for American workers as small and mid-sized business owners do.
In March, Congress passed resolutions reversing the DOL rule that allowed city and county governments to automatically enroll private-sector workers in municipal plans (Res. 67). President Trump signed the resolution in April, effectively blocking cities and counties from offering payroll-deduction IRA programs for private-sector workers.
The fate of state plans may now be in the hands of the judiciary. Already, seven states – California, Connecticut, Illinois, Maryland, New Jersey, Oregon, and Washington – have passed legislation. Thirty others have introduced legislation to create state-sponsored retirement plans, according to the AARP. It is expected that many of these will proceed with their plans, though it appears they will now need to comply with ERISA regulations.
In general, providing employees with a plan to save for retirement is laudable. However, many people don’t trust a government entity to run a retirement plan effectively. There are many reasons to be skeptical, and perhaps there is a simpler solution. The federal government could soften the regulations that guide private sector retirement plans, which would reduce complexity and cost for plan sponsors, and might encourage more businesses to offer qualified retirement plans.