In recent years there has been an increased interest in helping employees participate in retirement plan programs. Those efforts have manifested themselves in various proposals at the state and federal level. Focusing on the employer as a logical access point for employee retirement programs, states have been examining how to mandate employer-facilitated retirement program for employees.
Payroll deduction IRAs
A few states have enacted legislation requiring employers which do not sponsor retirement programs to set up a payroll deduction process whereby employees could contribute by payroll deduction directly to an Individual Retirement Account (IRA). The concern with such an approach is whether such programs would become in effect “employer pension benefit plans” covered by the Employee Retirement Income Security Act of 1974 (ERISA). If so covered, various rules regarding funding, reporting, and fiduciary responsibility would become effective.
In order to encourage the creation of state-sponsored programs and to alleviate concerns about becoming subject to ERISA regulations, the Department of Labor (DOL) has just issued a proposed regulation creating a “safe harbor program” for state-sponsored IRA programs.
Under the proposed regulations a program created under state law and administered by the state which requires employers to offer a payroll deduction IRA program will not be subject to ERISA, provided, among other things:
Participation by employees is voluntary
Employers are responsible only for collecting employee contributions by payroll deduction and remitting them to the program
The contributions are deposited into IRAs
The normal IRA distribution restrictions and rules apply
The state is responsible for either investing the IRA deposits or selecting the investment options for the IRAs
The state is responsible for notifying employees of their rights under the program
The state is responsible for enforcing employee’s rights
As a variation, the program could be designed to have an automatic enrollment feature requiring employees to opt out of contributions. Employer’s responsibility are and must be minimal. Employer may not contribute to the program or incentivize employees to participate. Employers must have no discretionary authority, control or responsibility.
State facilitated ERISA-covered retirement programs
At the same time as issuing its proposed regulation, the DOL issued an Interpretive Bulletin designed to encourage states to develop programs to assist employers in establishing ERISA-covered programs.
The Bulletin, among other items, discusses the possibility of states sponsoring a prototype retirement plan program. As encouraged by the DOL, states could design programs where employers could choose certain design features but the state would be responsible for acting as the plan administrator and fiduciary. The state would either assume responsibility for asset management or designate low-cost investment options.
The DOL also blessed the creation of state-sponsored multiple employer plans (MEPs). Under a state-sponsored MEP, various unrelated employers could adopt an ERISA-covered plan. The state or its designee would be responsible for running the plan as the plan administrator and would serve as the plan’s fiduciary. The state or its designee would arrange for the administration of the plan, selecting the service providers, choosing investment options, providing services and paying benefits. There would only be a single Form 5500 filed regardless of the number of employees who chose to adopt the program. The overall effect of a state-sponsored MEP would be to take advantage of economies of scale to lower administrative and investment costs.
The DOL approach here in seeking to facilitate state-sponsored retirement programs is interesting. At a time when the DOL is pushing with its proposed fiduciary regulations to make more persons fiduciaries, it is willing to give the state a free hand on investment decisions by not treating the IRAs as ERISA plans. Further, by blessing state-sponsored MEPs, the DOL is permitting the states to do something the DOL prevented the private sector from doing. The DOL refused to accept MEPs sponsored in the private sector unless there was some employment nexus between the employees in the MEP.We will have to see whether the states have the interest in getting more involved in the retirement business.