Senate Echoes House Votes to Remove State-Plan Safe Harbors

A resolution passed by the U.S. Senate is the latest step forward in the wider effort to roll back the regulatory safe harbors created by the Obama administration’s Department of Labor (DOL) to exempt from the Employee Retirement Income Security Act (ERISA) state- and city-run retirement plans created for private-sector workers.

The Obama administration had adopted the safe harbors to make it easier and safer, from a litigation perspective, for states and cities to step up and support small business employees by offering an opportunity to save for retirement via payroll deductions into tax-deferred accounts. The House of Representatives has already approved essentially the same measure, and President Trump has pledged to do as much as he can to remove financial/labor regulations implemented by his predecessor. And so it appears likely the combined efforts will succeed, sealing the fate of the Obama-era rules.  

Many providers have supported the moves by the House and Senate to effectively slow the creation of state- and city-run retirement plans for the private sector, but other parties are severely disappointed by these actions. They suggest the legislation on state- and city-plans in some clear respects conflicts with the Republican majority’s attack on the DOL fiduciary rule. On the one hand, the argument is that these state- or municipality-run retirement plans would not offer enough protections to main street investors if they are not subject to ERISA; on the other hand, the same group of lawmakers and lobbyists is fighting the fiduciary rule because, they say, it would be too burdensome to subject brokers and other providers to fiduciary standards under ERISA for the first time.

At the very least it can be argued that there is a clouded message on retirement regulation coming from the majority party in Congress. That overall picture is further obscured by the wider conversation about tax reform and the treatment of retirement investments from that perspective. There are now serious proposals being discussed by Republican House and Senate members to dramatically roll back the availability of tax-deferred retirement savings, mainly in order to pay for a lower corporate tax rate and other initiatives.

NEXT: Gauging the industry reaction 

News of the latest Senate vote on these matters broke well into the evening on Wednesday, but by early Thursday a host of financial services advocacy and lobbying groups had already registered their opinions with PLANADVISER.

Investment Company Institute (ICI) President and CEO Paul Schott Stevens, for one, applauded the move. He notes the House passed the same legislation, introduced by Representative Tim Walberg (R-Michigan), on February 15. Senator Orrin Hatch (R-Utah) has already “championed companion legislation, Resolution 32, in the Senate.” And a similar resolution signed into law by President Trump in April “restored the same protections for those enrolled in city-run plans.”

Stevens says these have all been “positive steps to ensure that savers in state-run retirement plans have the same strong consumer protections that workers with private-sector employer retirement plans have relied on for more than four decades.”

“The vote undoes a flawed Department of Labor decision to exempt state-run retirement plans from ERISA,” he says. “ICI’s research shows that these plans rest on shaky economic foundations. Denying ERISA protections to workers—who are automatically enrolled—would limit their legal remedies to fight against high fees or mismanagement of the plans.”

Given that ICI represents the interest of many large-scale, national investment product providers, it is no surprise that the group would rather see “national solutions to expand plan coverage, such as making available open multiple employer plans (open MEPs).” But Stevens says this would clearly be the better way to proceed for investors too, not just providers.  He says the country needs “simpler plans with less burdensome administrative requirements.”

Will Hansen, senior vice president of retirement and compensation policy for The ERISA Industry Committee (ERIC), agrees broadly with those sentiments. “While ERIC recognizes and supports policies that increase access to retirement plans, we believe the Labor Department rules over-reached, inappropriately allowing states to impose requirements on employers already offering retirement plans,” he says. “Last month, Oregon finalized rules for their mandatory state-run retirement plan that requires employers who already provide a retirement plan to compile and report information with the state, which is in direct violation of ERISA preemption principles.”

Additional reporting requirements for employers that already provide a retirement plan will only deter employers from providing a retirement plan, he says. “We look forward to working with policymakers on increasing access to retirement plans without infringing on employers who already provide a quality retirement plan.”

NEXT: Some opposition to Senate move 

The theme of establishing more federally-regulated multiple employer plans in favor of these state- or city-based arrangements is consistently cited by providers who have spoken out in support of the recent votes in the House and Senate. There was also the common theme that the Obama-era DOL had created an unfair competitive advantage by allowing state-run retirement plans to use auto-enrollment and auto-escalation features which are currently prohibited in some circumstances in the private sector.

While the preponderance of providers' opinions seems positive, one firm that is skeptical about the House and Senate votes is Segal Consulting. Senior Vice President Cathie Eitelberg says she actually expects states such as Oregon, which have already established a “Secure Choice plan,” as they are known, will not be changing course.

“It’s possible—even probable—that this will ultimately be a case for the courts but for now, the current situation will not deter states to try and set up a path to retirement security for their citizens that need it,” Eitelberg says. “As we’ve said before, a study conducted by our actuaries indicated this type of retirement plan was a win-win. It helps start a retirement savings plan for workers and, in the long run, could help states save on Medicaid costs by billions of dollars.”

Eitelberg warns this ongoing effort to dial back state- and city-run plans will only cement the current status quo, failing many workers: “For many Americans, retirement security seems like an impossible dream. Nearly half of America’s private-sector workers do not have access to a workplace retirement plan, according to the U.S. Census Bureau.”

Eitelberg points to Segal research that cites Government Accountability Office data to the effect that 68% of those who are not saving for retirement report working for an employer that does not offer a payroll deduction savings program.

“Those statistics are cause for concern,” she concludes. “Study after study demonstrates that having access to a retirement plan at the workplace and gaining the opportunity to make regular contributions through payroll deduction is the most effective way for workers to build retirement savings.”

Stay tuned to www.planadviser.com/compliance for ongoing coverage of this debate.