Road Ahead for Auto-IRAs and Open MEPs
PLANADVISER caught up with David Levine, principal and ERISA-specialist with Groom Law Group in Washington, D.C., a few days after the Department of Labor (DOL) published much-anticipated and increasingly controversial pieces of guidance to aid states with offering retirement planning solutions to private-sector workers who lack access to tax-qualified retirement plans at work.
Action this week from the DOL was two-fold, Levine explains. The Department’s Interpretive Bulletin 2015-02 sets forth its current view concerning the application of the Employee Retirement Income Security Act (ERISA) to “certain state laws designed to expand the retirement savings options available to private-sector workers through ERISA-covered retirement plans.” The Department separately released a proposed regulation describing safe-harbor conditions it would like to set up for states and employers to avoid creation of ERISA-covered plans as a result of state laws that require private-sector employers to implement in their workplaces state-administered payroll deduction individual retirement account (IRA) programs, commonly referred to as auto-IRAs.
In a conversation with PLANADVISER, Levine suggested the DOL’s rulemaking may not be as final or conclusive as the industry’s swift reaction would lead one to believe.
Q: What do you see as the most important elements emerging in the DOL’s interpretive bulletin and proposed rule?
There are different channels to look at here moving forward. You have the marketplace channel, you have the mandatory participation channel, and then you have the people who are focused on trying to do collectivization through an open multiple-employer plan (MEP) approach. And then you also have the prototype plan approach that was given the OK by DOL, but virtually nobody is doing that at the state level right now. There are some states that have potential prototype approaches based on their own plans for state workers, but there aren’t very many where that would be a good approach, it seems like.
The administration folks have been talking since they first came in that they’re worried about the coverage gap, and now this is their effort to try to close that gap. As I’m sure people have seen, there are lots of parties with different concerns about a level playing field and just the politics of it all. Private providers want to know, why is it you can have an open MEP run by the state for the private sector, but not such a plan run by the private sector for the private sector?
The DOL shares some arguments for this in the interpretive bulletin, and those will be more or less convincing to different parties. But one important challenge that I think DOL should answer and will have to answer is why the federal government doesn’t think the provider community is capable of delivering open MEPs, but somehow the state governments are going to be successful.
Q: Are you at all surprised by how directly some provider advocacy groups have come out and challenged this approach to closing the coverage gap? In a way, they are challenging a move to close the coverage gap, but then again they do have a right to fight for a level playing field. How do you see this playing out?
Right, I think the big issue here is just about consistency. In states that choose to go with the open-MEP approach this is especially the case. If you remember it was just in 2012 that the DOL came out with two advisory opinions where they basically said open MEPs won’t work for the private sector—and now with a quick analysis they have said the public sector can be successful in providing this to the private-sector workers. The concern coming from the private market providers is, how is this possibly consistent or fair? Will it really work?
We know people are going to make comments and be unhappy with this. The question is, where does this go from here? Articles have focused so far on what are peoples’ reactions, what I think is important too is thinking about, where do we go from here?
As it relates to auto-IRA and mandatory-coverage IRA programs especially, I think it’s perhaps less problematic than some providers are expecting at this early stage. For these things to be non-ERISA there are, I’m counting, 12 distinct requirements for these mandatory-coverage IRAs to actually get the safe harbor. So you’ve clearly got a number of steps the states will have to work through to deliver these products. It’s safe to say they will work through these steps, I think, but it remains to be seen what the final solutions will look like when brought to market and whether it will be an uneven playing field.
The DOL has said it has carefully designed its guidance to work with the states on this. As they move forward, I would not be surprised if we hear pretty serious opposition if the private sector thinks this goes too far—a process reminiscent of the fiduciary-rule debate even.
Q: What about on the open MEP side? What do you see as the likely outcome?
Yes, this to me is a whole different discussion, because MEPs have been viewed by many for small employers to be potentially a very positive and effective solution to get people saving—to cover all these uncovered people, as it were. That would probably be a positive for everyone, getting more people into the overall retirement system and making it easier for small business employers to maintain some type of retirement plan.
How settled the open MEP question is remains unclear when we remember the critical mass of proposals floating around Congress. You already have the SAFE Act from Senator Hatch. There’s the Retirement Security Act introduced both in the House and the Senate with Democratic and Republican support. You have now-retired Senator Harkin’s USA Retirement Fund proposal on MEPs.
This is the time when everyone is going to start looking towards the Hill. There is bipartisan support and there is workable legislation out there. Obviously there is room for clarification and improvement in these pieces of legislation and the proposed regulations and guidance now emerging from DOL. It’s not just the private sector that would benefit from a federal framework—it would also help the DOL with enforcement and its ability to do the kind of policing it wants to do.
To me, and where the attention is already turning among our clients, the question now is: What can and will the Hill do at this point? Is there an opportunity for lawmakers and regulators to move together in a way that creates a level playing field and level contours for providers while sweeping all these uncovered people into the system. It’s very doable in my opinion. We need the regulatory certainty. It will solve preemption issues that are going to emerge—that’s where the discussion will move now.
Finally, one question that’s still unresolved in the open MEPs, under the preexisting framework you could not as a state, how do I put this, require an employer to maintain participation in an open MEP. So there is need for a dialog about how we rectify all this. How do we reach the small employers who would really benefit from MEPs and get them to participate? Will the states do this like a 529 program an organize their select vendors? Will a vibrant marketplace be allowed to emerge around the MEP?
Depending on what Congress does in the end, I think we could still very likely get a good outcome, where MEP guidance actually benefits all parties.
Q: One question to leave you with, would you agree there is a meaningful retirement-centric movement in Congress that could hammer out a real open MEP system and materially change the coverage conversation? Retirement issues were tied into the budget agreement and retirement income adequacy clearly seems to be on the minds of legislative and administrative leadership. Maybe we will see some of these questions we have discussed answered sooner rather than later?
Absolutely, the answer I would leave you with is that I have long been following this MEP discussion and for a year I have been saying, if we’re going to get any legislation any time soon outside of pension funding relief, it will be in regards to open MEPs. I still believe that. MEPs have a commonality of interest. There will be people who will not be happy, a whole bunch of people, and they’ll be talking with their members and asking what their concerns are. I hope it leads to consistency and a clear and fair rule about who can do what.
It may be that in six months or a year we have meaningful movement on federal legislation that will clearly define the playing field—and everyone can play in it.