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State-Sponsored Retirement Benefits for Private-Sector Workers: They’re Closer than You Think

Tuesday January 19th, 2016

Estimated time to read: 1 minute, 45 seconds

Sixty-eight million American workers in the private sector do not have access to an employer-sponsored retirement plan. Twenty-six states are looking to change that by offering state-sponsored retirement plans—such as an automatic IRA or ERISA-compliant 401(k) account—that private-sector workers can contribute to through payroll deductions set up by their employers.


Details of these state-sponsored plans—often called “secure choice” programs—vary from state to state. Here are some of the most prominent examples:



  • California's Secure Choice payroll-deduction IRA program could provide retirement benefits to 6.3 million employees.



  • The Illinois Secure Choice program’s Roth IRA payroll deduction retirement savings program could cover 1.2 million employees.



  • Proposed legislation in Massachusetts would establish a Secure Choice Multiple Employer Trust, a single retirement plan that involves two or more unrelated employers, as well as a Secure Choice Individual Retirement Account Trust, similar to the Illinois program.



  • A task force in Maryland is investigating state-based private sector retirement program options.



Concerns over federal intervention in such retirement savings programs have prevented states from implementing them in the past. Specifically, states have feared that any automatic enrollment program they launch would be subjected to the rules of the federal Employee Retirement Income Security Act, thus exposing employers to ERISA’s fiduciary obligations.


States have long sought support at the federal level to address these concerns. Late last November, they finally got it. Labor Secretary Thomas E. Perez announced that the goal of the Obama administration is to eliminate the obstacles that are preventing states from implementing retirement programs because states “belong in the policy-making vanguard, especially on an issue as important as retirement security.”


With that, the Labor Department released new guidance that clarifies that states are authorized to sponsor and administer ERISA-compliant 401(k) plans for a wide range of businesses. The guidance also includes a proposed rule that would give employers a safe harbor from ERISA.


The department’s rule specifies that the state—not the employer—will function as the fiduciary in voluntary state-sponsored plans. With the state acting as the fiduciary, states and the Department of Labor are hopeful they will receive less resistance from employers in setting up state-sponsored employee retirement plans.


Perez said that the guidance minimizes risk for employers, but warned that states must be aware of potential legal challenges because they “could never eliminate litigation risk.”


The DOL and states are also dealing with private-sector opposition to these plans. The American Retirement Association said that state-sponsored plans:



  • create an anti-competitive market for retirement plan providers,



  • create an un-level playing field between the public and private sectors, and



  • provide no justification that states can do a better job at managing retirement plans.



Meanwhile, the Financial Services Institute has attempted to stop states from developing automatic enrollment retirement savings programs, saying consumers are better served by accredited financial advisers.


But with so many American workers lacking access to employer-sponsored retirement plans, at least some states believe they can now play major roles in helping these individuals save for the future through a state-sponsored plan.