As the workforce ages, a handful of states have enacted programs instituting state-sponsored retirement plans for private sector employees in an effort to increase the number of people covered by retirement plan programs. They are California, Connecticut, Illinois, Massachusetts, Maryland, New Jersey, Oregon, and Washington. Other states are considering them. Some of the state programs mandate employers that do not have retirement plans to automatically enroll their employees into state-sponsored programs. Others simply are offering programs to provide plans with the state taking on much of the administrative burden.
Employers which find themselves compelled to offer such programs have feared being involuntarily subjected to the fiduciary standards, administrative burdens and other compliance issues under the Employee Retirement Income Security Act of 1974 (ERISA) which could result in financial exposure. All this for a program they did not wish to have.
In part, to allay employers’ concerns, and in large measure to facilitate such state-sponsored programs, the Department of Labor (DOL) recently finalized regulations under ERISA which effectively carve out such programs from coverage under ERISA. Specifically, the DOL changed the definition of “employer pension benefit plan” to exclude such programs under ERISA.
To be excluded from ERISA these state programs must:
- be established pursuant to state law;
- be implemented and administered by the state or a governmental agency or instrumentality of the state;
- be designed such that the state is responsible for selecting the investment alternatives for employees;
- have the state assume responsibility for the security of the payroll deductions and employee savings;
- have measures to ensure employees are notified of their rights and have mechanisms to enforce such rights; and
- provide participation by employees is voluntary.
Further, to be excluded from ERISA coverage, employer involvement must be mandated under state law and the employer’s involvement must be limited to collecting and remitting employee payroll deductions and distributing information to the employees and/or the state.
An employer may have no discretionary involvement and can receive no consideration other than tax incentives for participating.
The DOL is also considering permitting political subdivisions to implement such programs when the states decline to do so. Therefore, one might have to offer a mandatory retirement program for employees in one city, but not in another.
Protecting employers from involuntarily being subject to ERISA is a good start for such state programs. But, it will be interesting to watch how the states deal with the fiduciary issues and the administrative complexities of retirement plans.