Two pieces of legislation that would roll back Labor Department safe harbors for state and municipal-sponsored retirement plans have passed the House of Representatives, largely along party lines.
Last August, the Labor Department finalized a safe harbor that facilitates state-sponsored retirement plans for private sector businesses that don’t offer a workplace retirement savings option. The Labor Department estimates that 39 million Americans don’t have access to a retirement savings option through the workplace.
Last December, the DOL finalized another safe harbor that allows cities and counties with populations of at least 600,000 to sponsor retirement plans, so long as those municipalities are not located in states that sponsor a retirement plan.
Under the safe harbors, states and qualifying municipalities are allowed to mandate participation in retirement plans.
Some states have already created state-sponsored plans
In September 2016, California Gov. Jerry Brown signed the Secure Choice Act into law. If that law stands, it ultimately will require all employers with at least five employees that don’t sponsor a retirement plan to enroll workers in an IRA administered by the state. Workers will be automatically enrolled, and 3 percent of salaries will be defaulted into the accounts. The rule is scheduled to be phased in by 2018, starting with larger employers with 100 workers.
In addition to California, Connecticut, Illinois, Maryland, and Oregon have already passed legislation requiring participation in state-sponsored IRA savings plans. Upwards of 20 other states are considering comparable legislation. The State of Washington has passed a law creating a state-sponsored savings option, but it does not mandate participation, meaning the city of Seattle would be allowed to sponsor a retirement plan.
Plans that qualify under the safe harbor will not be required to comply with the Employee Retirement Income Security Act, which holds all private-sector employer retirement plan sponsors as fiduciaries, and creates consumer protections for participants in 401(k) and defined benefit pension plans.
In order to qualify for the safe harbor, states can automatically enroll workers into IRAs, but the laws must include an opt-out provision. Also, employers cannot contribute to the savings accounts, and are limited to administrative roles, which include facilitating payroll deductions and distributing education materials.
The safe harbors are designed to free employers that participate in state and locally sponsored retirement plans from liability under ERISA, which allows participants in 401(k) plans to sue their employers if savings are not managed in the best interests of workers.
Budget proposals under the Obama administration included provisions for a federally sponsored retirement program to fill the gap for the millions of Americans without access to workplace savings plan, but that idea never gained traction on Capitol Hill.
In the summer of 2015, President Obama instructed the Labor Department to craft regulations that would facilitate efforts at the state level to sponsor retirement plans.
Safe Harbors stand a good chance of getting killed
The two resolutions that would roll back the safe harbors were introduced last week by Republican members of the House subcommittee on Health, Employment, Labor, and Pensions.
All but three Republicans in the House voted for the resolutions, which were brought under the Congressional Review Act. Only one Democrat voted for the resolutions.
Under the CRA, Congress can block recently issued regulations with majority votes, meaning only 51 votes will be needed to block the safe harbors in the Senate, where Republicans hold 52 seats.
Only one regulation has been overturned under the CRA since its passage in 1996, according to the Congressional Review Service.
But the law is expected to be used much more actively under the Trump administration’s pledge to roll back Obama-era regulations.
Critics of the safe harbors argue they erode the preemptive power of ERISA, a federal statute, and will ultimately undermine the retirement savers’ consumer protections in that law.
The Investment Company Institute, which represents the interests of mutual fund companies and has been one outspoken critic, has argued that state-run retirement plans could ultimately leave taxpayers on the hook for funding shortfalls.
“ICI research has demonstrated that the programs developed under the DOL’s new rules rely on shaky economic foundations, making the consumer protections mandated by ERISA all the more necessary,” said ICI president and CEO Paul Schott Stevens in a statement when the resolutions were introduced last week.
The AARP is among the organizations that have lobbied for state-run retirement plans.
On the House floor before the vote, Rep. Tim Walberg, R-MI, sponsor of one of the resolutions and chair of the House HELP subcommittee, said the safe harbors are loopholes that will put retirees and taxpayers “at risk.”
Rep. Nancy Pelosi, D-CA, minority leader in the House, argued that Republicans were doing the bidding of Wall Street interests in trying to rescind the safe harbors.