When California first considered a state-run retirement plan for private workers in 2008, the private retirement industry warned of the many obligations that stem from operating such a plan, because retirement plans for private workers are covered under the Employee Retirement Security Act of 1974 (ERISA). ERISA provides that the fiduciary – generally the entity establishing the plan – must comply with a number of rules and regulations to ensure the protection of worker savings. Rather than take on these obligations, the states turned to the Department of Labor (DOL) to establish a “safe harbor” that would remove states from having to comply with ERISA’s responsibilities. Earlier this year, Congress rightly determined that all private workers deserve the protection of ERISA and overturned the DOL “safe harbor” in a resolution of disapproval under the Congressional Review Act.
Nonetheless, several states have determined that they will move forward without providing ERISA protections and without the DOL safe harbor. Specifically, Oregon is instituting the first wave of its OregonSaves program, which requires private employers who do not offer a retirement plan to enroll their employees in the state program. If these actions impacted only the states, then there would be less cause for concern. However, these actions could have incredibly negative consequences for both employers and workers in these states.
A legal memorandum from Eversheds Sutherland, LLP to the U.S. Chamber outlines these dangers. First and foremost, the memo finds that these programs are most likely to be found to be ERISA plans. There are two possible consequences to this finding. One, the law implementing the plans are found to be pre-empted by ERISA and, therefore, prohibited. As such, the tax money spent implementing these plans will have been wasted, and it is uncertain what will happen to workers’ funds that have been collected. Two, employers could be found to be the fiduciaries of the plans and become responsible for all of the obligations under ERISA that the states were unwilling to shoulder. Moreover, the memo acknowledges – as did the DOL – that the courts are the ultimate arbiters on the legality of these programs. Therefore, employers are being forced to enter into a legally uncertain scheme whereby the only way out is through a lawsuit.
The U.S. Chamber has long called for changes that will expand the private retirement system without placing employers and workers in jeopardy. The report, State Auto-IRAs: The Wrong Answer, lists a number of legislative and regulatory proposals to enhance the private retirement system including:
- Multi-Employer Plans (MEPs) that would let small businesses “join” a plan with other businesses instead of offering one alone.
- Small business tax credits for employer-plan startup costs.
- Encouragement of Employee Stock Ownership Plans (ESOPs) by protecting them from frivolous lawsuits and excessive regulation.
- Simplifying and streamlining regulatory compliance to encourage businesses to offer retirement plans for their workers.
When will the states to listen to the stakeholders? Must the courts get involved before the states realize they are going down a risky road?
About the authors
Aliya Wong was the Executive Director of Retirement Policy at the United States Chamber of Commerce.