The U.S. Department of Labor has finalized a rule that intends to assist states in creating workplace retirement savings plans.

To date, eight states have already passed legislation creating various forms of state-run workplace retirement savings programs.

But as more states have explored the possibility of creating a state-sponsored workplace savings program, some legislators and regulators have expressed concern that prospective plans would “run afoul” of the Employee Retirement Income Security Act, said Labor Secretary Thomas Perez in a press call announcing publication of the final rule.

With publication of the new final rule, Perez said the Labor Department believes “we have provided a road map” that will assure states can sponsor a workplace plan that “doesn’t run afoul with ERISA preemption.”

Due to the broad scope of ERISA, which courts and regulators have interpreted to cover any retirement plan established by an employer, even when the employer only has minimal involvement in a plan, stakeholders voiced concern that employers offering state-run plans would inadvertently establish ERISA-covered plans, and thereby open employers up to potential liability.

That uncertainty has created a “serious impediment” to wider adoption of state payroll deduction savings programs, according to an explanation in the final rule.

An existing safe harbor under ERISA allows employers to establish payroll deductions to IRAs without being subject to liabilities under ERISA.

Of the conditions in the original safe harbor, an employee’s participation must be completely voluntary. If an employer automatically enrolls workers in an IRA, even when giving the option for employees to opt out, the plan would not be considered completely voluntary, and would thus be regarded as an ERISA plan.

But at least five of the new state-administered plans created in the past two years require employers to automatically enroll employees.

The new safe harbor established with the publication of today’s final rule amends the original ERISA safe harbor relative to state-administered plans.

Now, under the new rule, the original safe harbor’s “completely voluntary” provision has been modified to allow states to automatically enroll employees in a state administered IRA, so long as they have the ability to opt-out of the program.

Other conditions in the final rule

In order for states to require automatic enrollment in state-administered IRA plans, other provisions must be met for those plans to be considered outside of ERISA’s regulatory domain.

Mandated participation must be established by state law, and the plan must be administered by the state, though state agencies are allowed to contract with service providers to help administer the plan.

The state — and not the employer — must be responsible for investing payroll deductions and selecting the investment options employees choose from.

The state — and not the employer — must be responsible for the security of payroll deductions and employee savings.

And the state must adequately notify employees of their rights under the program, “and must create a mechanism for enforcing those rights,” according to the new final rule.

Employers’ limited role

In order to qualify for the amended safe harbor, employers cannot contribute employer funds to the IRAs. And employers’ participation must be mandated by state law.

Employers’ roles must be limited to “ministerial activities,” according to the final rule, such as collecting payroll deductions and remitting them to the state. Employers can provide notice to employees of the payroll deductions, and can provide information to the state for administration of the program. Also, employers can distribute information from the state to workers about the savings program.

Employee rights

While states can mandate automatic enrollment, employee participation must ultimately be voluntary.

The ability to opt-out of a state-administered plan must be available to qualify for the new safe harbor. “Adequate notice” of that right must be provided by the state. And employees must be notified of the “mechanism for enforcement of those rights,” according to the final rule, which does not specify what that mechanism would be.

Changes in final rule from the proposed rule

The final rule added language clarifying that in issuing a new safe harbor, states are not limited to designing plans or programs that operate outside of the safe harbor.

In other words, the final rule does not “prevent a state from creating an ERISA plan,” clarified Perez in the press call.

The final rule also removes a condition in the proposed rule that would have limited states from limiting early employee withdrawals from savings plans.

The purpose of that provision in the original proposal was to assure employees had control over their retirement assets.

But commenters suggested that would limit states’ ability to address plan leakage. Also, in allowing states to set withdrawal restrictions in the final rule, program administrators have greater flexibility to offer annuities and other guaranteed income design. The final rule says that any restrictions on withdrawals are best left determined by individual states.

The final rule also modifies restrictions on how states can reimburse employers for providing payroll deductions, and allows states to offer tax incentives and credits for participation.

The final rule added language clarifying that states can offer programs only to employers that do not already offer some workplace savings plan. The proposal’s original language stated plans could be offered to non-eligible workers employed where some plan is already offered. In clarifying the final rule, the Labor Department says that employers will not be incentivized to not offer a plan from the private sector.

No dance partner at the federal level

The final rule is a result of a directive President Obama issued to the Labor Department at a summit on aging in July of 2015.

President Obama has recommended a federal IRA payroll deduction program to address the one-third of workers that are not offered a savings program through their employers in each of his budget proposals.

But Republicans in Congress have consistently opposed that effort, said Perez during the press call.

In order to circumvent legislative stasis at the federal level, the Labor Department has worked “side-by-side” with states that have already legislated state-run payroll deduction savings programs, said Perez.

“Today’s rule will pave way for states to create and implement innovative new ways for workers to save,” added Perez. “At the federal level, we do not have a dance partner. Republicans want to promote the status quo. The cost of doing nothing is significant, and that’s not good for retirees, and puts additional burdens on tax payers” in the future.

Along with the publication of today’s final rule, the Labor Department has also issued a proposed rule that would expand the new safe harbor to large municipalities with at least the population of Wyoming, the least populous state.

The final rule for states will be enacted 60 days from the rule’s publication. The proposed rule for cities will be open for a 30-day comment period.

Instant Insights /

DOL releases final rules on state-run retirement plans

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