California’s State-Run Retirement Plan to Proceed, Despite DOL Rule Repeal
posted by Fisher 401(k) June 6, 2017
On May 17, President Donald Trump signed into law a repeal of an Obama-era Department of Labor rule providing guidance on the creation of state-run retirement plans. The repeal affects more than 30 states that have either implemented or are considering legislation for such plans. That includes California’s Secure Choice Retirement Program—seen by some as the nation’s pilot program for state-run retirement plans.
State-run retirement plans, such as California’s, are meant to allow employees who don’t have access to a retirement plan in their workplace a chance to contribute earnings to a government-run individual retirement account (IRA). About half of all U.S. workers don’t have access to a company-sponsored retirement plan, in part because small businesses don’t often have the resources or time to offer and manage a 401(k) plan.1 Government-run retirement plans have been developed at the state level to help fill in the existing retirement gap and give employees an opportunity to save. Workers are 15 times more likely to save for retirement if they have access to a plan through their employer.
The DOL’s final rule on state payroll deduction IRA accounts, which was effective beginning October 2016, would have allowed some state-run retirement plans to be exempt from the 1974 Employee Retirement Income Security Act (ERISA). ERISA establishes the minimum standards and rights for pension and benefit plan recipients—and beneficiaries—that businesses must abide by.
Republicans in the House and Senate, including Sen. Orrin Hatch, the author of the senate bill, cited the loss of participant protections under ERISA as their primary concern for passing the repeal legislation. ERISA provides three main protections to employees:2
- Requires that employees 21 and over have access to any pension or benefit plan in place, assuming they have worked for that employer for at least 12 months
- Employees can’t be fired to prevent them from participating in the plan
- Makes an employer liable for the mismanagement of retirement funds, as part of the business owner’s fiduciary duty
Under California’s Secure Choice Program, businesses with five or more employees that don’t offer a retirement plan will be required to provide employees with a savings option. The employees are automatically enrolled at a savings rate of 3% of salary, with an escalation of up to 1% each year (to a maximum of 8%), and can opt out of the program at any time. However, since the business owner is merely facilitating employee access and carrying out limited administrative duties, the owner has no fiduciary duty under California’s law.3
In place of the federal ERISA protections, California’s Secure Choice would require that the state’s Investment Board have a fiduciary duty to act in the best interest of participants. In order to protect taxpayers from liability, the law would also require the Board to have an insurance, annuity, or other funding mechanism in place at all times that “protects the value of individuals’ accounts and protects, indemnifies, and holds the state harmless at all times against any and all liability” for paying retirement benefits.4
One obstacle Secure Choice now faces relates to whether the program is voluntary. A condition of the old rule was that employee participation in a retirement plan had to be “completely voluntary”—an employee’s enrollment in a plan had to be self-initiated, in other words. The 2016 DOL rule changed the language to “voluntary,” opening the way for programs like Secure Choice, which automatically enrolls employees but allows them to opt out. The Trump administration’s repeal returns the language to the old rule, creating a challenge for Secure Choice and similar programs.5
Despite potential legal trouble on the horizon, California State Sen. Kevin de Leon released a statement after President Trump signed the repeal, saying that the Secure Choice Program stands on “firm legal and statutory ground and will proceed without delay.”
California’s State Treasurer, John Chiang, is also “confident that California is on strong legal footing in moving forward to make Secure Choice a reality.”
California’s two northern neighbors, Oregon and Washington, are also in the process of implementing bills of their own. While Washington’s law is vastly different, Oregon’s law is similar to California’s in that it sets up an auto-enrollment process for workers who are employed by businesses with a certain number of employees. Oregon’s State Treasurer Tobias Read says that Oregon will also be moving forward with their law.
“In Oregon, OregonSaves will continue to move forward with our pilot program that is launching on July 1 this year,” Read said in a statement after the repeal bill passed the U.S. Senate.
To read more from our Who’s Helping America Save? series, click here.
1 Brookings Institute. Structuring State Retirement Saving Plans: A Guide to Policy Design and Management Issues. September 2015.