States Look to Close Retirement Plan Coverage Gap

By Randy Myers


In a country where defined contribution plans have become the most common way to save for retirement in the workplace, many Americans are being left behind. According to a study by the Pew Charitable Trusts, about 40 percent of full-time private sector workers in the U.S. do not have access to a workplace retirement savings plan. Now, many states are trying to resolve the problem on their own—with some new help from the Obama Administration.

Spurred by the President in August, the Department of Labor (DOL) issued a final rule designed to allow states to offer plans without being subject to the Employee Retirement Income Security Act (ERISA). Under the rule’s safe harbor provisions, states could mandate that employers who do not already offer a workplace retirement plan automatically enroll their employees in a state-run plan, with contributions typically going into an Individual Retirement Account. Employees would have the option to opt-out of the plan.

The Obama Administration’s insistence on creating this safe harbor has not been without controversy, and the DOL has long seemed unenthusiastic about the idea. The intent of ERISA, after all, was to safeguard the retirement savings of all Americans. The DOL has even acknowledged that while it has created what it considers a safe harbor for states—one that would not be preempted by ERISA—it will be up to the courts to finally decide that issue, not the executive branch of the federal government.

Despite these caveats, the new rule is expected to give impetus to state-led efforts that in some cases have been underway for years.

Speaking at the 2016 SVIA Fall Forum, Jessica Duhamel, director of public policy for Fidelity Investments, noted that since 2012, at least 30 states have considered proposals to study or establish state-run plans. The other key point Duhamel made is that six states have passed laws authorizing state plans (California, Connecticut, Illinois, Massachusetts, Maryland and Oregon) and that two states (New Jersey and Washington) have passed voluntary marketplace bills.

Of note, she said, no plans are operational yet, though Washington State is expected to be operational in January 2017.

In addition to the activity at the state level, Duhamel noted that some large cities, including New York City, Philadelphia, and Seattle, also have been exploring the possibility of creating their own plans.

The push for state-level plans may not be entirely free of self-interest on the part of government. Michael Tobin, Corporate Vice President, Office of Governmental Affairs, for New York Life Insurance Company, joined Duhamel in speaking on the topic. He noted that if Americans are not saving enough for retirement, it boosts the odds that government will need to step in to provide them with assistance after they stop working.

Howard Bard, Vice President, Taxes and Retirement Security, for the American Council of Life Insurers, added that it would not be surprising to see state-run plans challenged in court. Such a challenge might come from an employer who already offers a plan but would be required, by a new state mandate, to enroll part-time and seasonal workers into a state-run plan. The employer’s argument, Tobin said, might be that under the state plan, workers would not enjoy the same fiduciary protections enjoyed by participants in traditional, ERISA-covered employer-sponsored plans.

“We could see a patchwork system that ERISA was supposed to prevent,” Tobin concluded.