In response to Congressional Review Act activity on state-sponsored retirement plans, there is an outcry that Congress is impeding on states’ rights to help their employers and employees save for retirement. In fact, the exact opposite is true. By eliminating loopholes for states, Congress is ensuring that states who want to provide retirement options for private employees are provided with the same protections as all other private employees.
The Employee Retirement Income Security Act (ERISA) is a federal statute that oversees the implementation and management of private, employer-provided retirement plans. To guard against fraud and abuse, ERISA establishes minimum requirements for employers who administer these retirement plans for their workers. These requirements include providing information to participating workers about the retirement plan, its investments, associated fees, funding, vesting schedules, and other key terms. Further, in accordance with the common law principles of trust law, ERISA imposes strict standards of accountability on plan fiduciaries by requiring them to handle fund assets in the best interests of the plan participants. Fiduciaries who fail to follow these principles may be held personally liable for restoring losses to the plan. The potential penalties are backed by the threat that under ERISA either the government or individual plan participants can exercise the right to sue for lost benefits and breaches of fiduciary duty.
States falsely argue that they cannot provide benefit plans without an exemption from ERISA. To the contrary, there are several options for states that want to enhance retirement savings without undoing ERISA protections.
Washington and New Jersey have enacted Marketplace Retirement Savings programs. While different in details, the premise is that the state would work with employers to establish a program that connects eligible employers with qualifying plans. Participation in the marketplace is completely voluntary for both employers and employees and generally limited to small employers with less than 100 workers. Under these marketplace plans, the state may set parameters for the types of investments and the costs and also develop educational and marketing materials among other things.
Massachusetts has adopted another approach – a prototype plan for nonprofit organizations with less than 20 employees. In this approach, participation by the organizations is voluntary. The retirement plan would be a tax-qualified defined contribution arrangement with various investment options available to employees. Contributions could be made by workers, their employers, or both. Employers would assume fiduciary obligations but could also delegate responsibilities to others – for instance, state law could allow the state or a state designee to perform these functions. Thus, the state or a designated third-party could assume responsibility for most administrative and asset management functions of an employer's prototype plan. The state could also designate low-cost investment options and a third-party administrative service provider for its prototype plans. This model could easily be expanded to for-profit organizations which would allow private employees to maintain ERISA protections.
Moreover, the DOL has provided an option for states to assist private employees under ERISA. At the same time that the DOL issued the loophole for state plans, it also issued an Interpretive Bulletin that allows states to provide retirement savings for private employees under ERISA. In this guidance, the DOL acknowledges the benefits of states operating under ERISA:
There are advantages to utilizing an ERISA plan approach. Employers as well as employees can make contributions to ERISA plans, contribution limits are higher than for other state approaches that involve individual retirement plans (IRAs) that are not intended to be ERISA-covered plans, and ERISA plan accounts have stronger protection from creditors. Tax credits may also allow small employers to offset part of the costs of starting certain types of retirement plans. Utilizing ERISA plans also provides a well-established uniform regulatory structure with important consumer protections, including fiduciary obligations, automatic enrollment rules, recordkeeping and disclosure requirements, legal accountability provisions, and spousal protections. (§2509.2015-02)
Under this guidance, a state could establish a “multiple employer” 401(k)-type plan, defined benefit plan, or other tax-favored retirement savings program. Employers that meet specified eligibility criteria could join the state multiple employer plan which would be subject to ERISA and Internal Revenue Code tax qualification requirements. The state, or a designated agent, would be the plan sponsor under ERISA and the named fiduciary and plan administrator responsible for administering the plan, selecting service providers, communicating with employees, paying benefits, and providing other plan services. A state could take advantage of economies of scale to lower administrative and other costs. Moreover, fiduciary responsibilities could be divided between the employers, the state, or other designated agents.
Consequently, there are three existing options for states that do not requires exemptions from the requirements of ERISA - a Marketplace Plan, a Prototype Plan, and a State Multiple Employer Plan. Each of these options facilitate employers and employees with retirement savings while still providing ERISA protections. So, the question is – why do some states want to manage plans for private employees without providing the protections of ERISA?
About the authors
Aliya Wong
Aliya Wong was the Executive Director of Retirement Policy at the United States Chamber of Commerce.
