‘DOL Lacks Study of Retirement Participant Safety’ ICI Says

Joining the chorus of other providers and industry organizations, the Investment Company Institute (ICI) raises a number of issues with the state-run retirement proposal from the Department of Labor (DOL). 

The DOL proposal that aims to help states create retirement plans for private-sector works would result in a confusing patchwork of disparate state-run savings programs, ICI says. In its comment letter, the institute says these savings programs would suffer from their lack of strict federal protections mandated for private employers’ retirement plans. 

The organization says it’s concerned that the DOL proposal and its accompanying guidance support policies that could harm the voluntary system for retirement savings that now helps millions of private-sector American workers achieve retirement security.

A serious sticking point for ICI is the proposal’s exemption from Employee Retirement Income Security Act (ERISA) protections without sufficient understanding about the management and administration of the state-run programs. These programs could lack critical protections provided by ERISA—including reporting to federal agencies, disclosures to participants and beneficiaries, and strict fiduciary standards—designed to prevent mismanagement and other abuses.

ICI faults DOL’s decision to cede jurisdiction under ERISA to the states, finding the Department’s legal analysis inadequate. DOL should have considered the need for ERISA protections for participants, in addition to focusing on employer involvement in the plans, ICI says. Rather than proposing a blanket exemption, DOL should determine, case by case, that ERISA’s protections are unnecessary for a particular program before excluding it from ERISA. 

DOL appears to make unsupported assumptions about states’ qualifications to offer private-sector retirement solutions, expertise, and ability to operate free of conflicts. Importantly, the DOL was not in a position to make a blanket determination that ERISA protections are not needed since details of the administration and asset management of state programs are still unclear—even in states that have enacted legislation.

The institute points out that since its passage in 1974, ERISA has displaced state laws governing private-sector employee retirement plans. ICI expresses concern that DOL’s proposal attempts to nullify that preemption. It is clear, ICI says, that Congress intended ERISA’s preemption provision to ensure that employers would not be subjected to a patchwork of the different and possibly conflicting requirements of 50 states. The analysis supporting DOL’s attempt to nullify preemption falls short, ICI says, arguing that at the very least DOL must clarify that state laws that could directly or indirectly serve to set minimum standards for ERISA plans would be preempted.

The proposal could give a competitive advantage to the state-run payroll-deduction individual retirement account (IRA) arrangements excluded from ERISA, ICI says. Allowing the state-based programs to provide automatic enrollment and escalation of contributions, features unavailable for such programs offered through the private sector, could create an unlevel playing field, with special advantages for the state-run programs.

Under separate guidance accompanying the proposal, states would also be allowed to sponsor an open multiple employer plan (MEP). In an open MEP, otherwise unrelated employers jointly sponsor a single plan. Existing DOL guidance generally precludes private businesses from sponsoring open MEPs for unaffiliated employers.

ICI also addresses questions raised in the DOL proposal’s Regulatory Impact Analysis (RIA) regarding the potential for state initiatives to foster retirement security, including the possible unintended negative consequences to workers targeted by the state initiatives. ICI suggests DOL consider strong, research-based evidence that some lower-income workers may not be helped by this proposal.

The benefits of the proposal may not measure up to the level anticipated in the RIA, which assumes the participation and opt-out experience in the state-mandated IRA programs will be the same as the experience of voluntary private-sector retirement plans. ICI pointed out weaknesses in that assumption, including the fact that 401(k) plans with automatic enrollment tend to have other plan features that also encourage participation and reward contribution.

A study by ICI and BrightScope suggests that some of the results achieved with automatic enrollment may reflect the influence of other plan features. The RIA should take into account that without features other than auto-enrollment—including employer contributions, which would not be permitted in the state plans under the proposal—the state initiatives may not increase retirement plan participation and savings as effectively as is hoped.

ICI emphasizes that it strongly supports efforts to promote retirement security for American workers and appreciates the DOL’s participation in shoring up workers’ retirement resources. “Unfortunately, the department’s proposal and guidance would promote the development of a fragmented scheme of retirement savings programs that vary state by state—without any clear benefit and with potential harm to our current national, voluntary retirement system,” says Paul Schott Stevens, president and chief executive of ICI. “Policymakers should pursue national solutions to achieve expanded coverage, building on the current voluntary system.” 

NEXT: SIFMA brings up shortcomings in proposal.

SIFMA also submitted a comment letter weighing in on the DOL’s proposal and registering similar concerns.

SIFMA believes the proposal does not address the fundamental issues that prevent Americans from saving more for retirement. It puts an additional cost burden on states and crowds out the private market. States would be highly unlikely to provide the same level of education, service and guidance as private sector providers.

The group raises concerns with the Mandatory Auto IRA in that it will discourage business owners from providing more expansive and substantive retirement plans. Setting a minimum requirement would encourage employers to take this option as the easy way to avoid creating 401(k), SEP or SIMPLE plans, which offer greater saving options to employees.

“We agree Americans should be saving more for retirement, but the DOL’s proposed safe harbor for state-run retirement plans is counterproductive to achieving that objective by eliminating important protections provided under ERISA and discouraging employers from voluntarily establishing more substantial plans for employees,” says Lisa Bleier, SIFMA managing director and associate general counsel.  “Our retirement savings gap is not due to a lack of affordable options, but a lack of education on the importance of saving. State-run plans are not the solution to our saving problem and by granting states a safe harbor, the DOL will only make a flawed policy even worse.”