Some in the U.S. Congress want to make it harder for the states to solve a big problem: their private sector workers’ lack of retirement savings. As has been true for the last forty years, half of private sector employees – many working for small businesses – do not have a retirement savings plan at their job. Without a retirement plan, most people do not save. The federal government has tried to solve the problem by offering plans tailored to small business, but the take-up has been very small. And Congress has considered ways to expand coverage, but has not passed any such legislation. In response, the states have stepped into the breach.
Five states – California, Connecticut, Illinois, Maryland, and Oregon – are in varying stages of developing a so-called “Auto-IRA” program, which would require employers without a retirement plan to automatically deposit some of their workers’ paycheck into an individual retirement account. The program would be voluntary – workers can always opt out. The employer’s role is limited to making sure the right contribution amount is sent in, with no match or fiduciary responsibility required or even allowed. Taxpayers are not at risk because these programs consist of individual accounts – thus no issue of underfunding, as can occur in traditional pension plans – and the investments are administered by private sector firms, not the state government.
To clarify any ambiguity about the legal status of these state programs, in 2016 the Department of Labor (DOL) finalized a rule entitled “Savings Arrangements Established by States for Non-Governmental Employees.” This rule made it clear that state auto-IRA plans would not be covered under ERISA, the federal regulation offering consumer protections to those with employer retirement plans. While ERISA is a great thing, and the states involved should make sure their programs incorporate similar protections, if the programs were covered by ERISA then they might be “preempted” by the federal law. This preemption would mean that the states would not be able to offer their programs. While many lawyers believe such programs would not be covered by ERISA under an earlier 1975 rule, others are worried that, without the new language, the programs could perhaps be struck down. So the new rule offers valuable clarity.
Making it easier for people to help themselves secure an adequate retirement should be something that both Republicans and Democrats can stand behind. So why is this issue even on Congress’ radar screen? The answer is that trade associations for financial firms – the Investment Company Institute and the American Council of Life Insurers – believe that state Auto-IRAs could impede firms from expanding their own 401(k) client base. However, forty years’ efforts have not moved the needle on coverage, so nothing is likely to happen on the coverage front without Auto-IRAs.
On Feb. 15, the House of Representatives used its power under the Congressional Review Act to vote to overturn the 2016 rule. The ball is now in the Senate’s court. On this issue, the Senate can do its best work by doing nothing. If the Senate does not act within the next few weeks, their ability to overturn the rule expires. Alternatively, if the Senate takes up this issue, senators should just vote “no.”
Alicia H. Munnell is director of the Center for Retirement Research at Boston College and the Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management.
The views expressed by this author are their own and are not the views of The Hill.