Officials in California, Illinois, and Oregon are vowing to move forward with state-administered retirement programs even after the Senate scuttled an Obama-era regulation that paved the way for such plans.

“The need to address the oncoming retirement crisis is too great” to not move forward, said Oregon’s state treasurer, Tobias Read, in a statement.

A resolution to roll back a Labor Department safe harbor that facilitated states’ ability to mandate participation in retirement plans passed by a 50 to 49 margin, with two Republicans—Sen. Bob Corker of Tennessee and Sen. Todd Young of Indiana--voting with Democrats to uphold the safe harbor. President Trump is expected to sign the resolution into law.

Initiatives to address retirement savings shortfalls at the state level have been in the making for several years. As some states began crafting legislation, they asked the Obama Administration for regulatory backing that would allow the plans to operate outside of the Employee Retirement Income Security Act, the federal statute that governs private sector defined contribution and pension plans and guarantees investor protections by requiring employer-sponsors of retirement plans to be fiduciaries.

In August 2016, the Labor Department finalized a safe harbor that said states could require employers that don’t offer a voluntary workplace retirement plan to auto-enroll workers in state-administered IRAs. In order to satisfy the safe harbor from ERISA, states would have to allow workers to opt-out of the plan.

During the debate before the vote in the Senate, Republican leaders Mitch McConnell of Kentucky and Orin Hatch of Utah expressed concern that the safe harbor would deprive participants in state plans of ERISA’s consumer protections. They also said state plans would put private sector retirement plan providers at a competitive disadvantage.

Proponents of the safe harbor included several Republican state treasurers, who lobbied lawmakers in the months leading up to the vote on the grounds that the state plans are a fiscal necessity, as responsibility for millions of retirees leaving the workforce with little or no savings will eventually fall to social welfare programs funded at the state level.

That argument appears to have influenced Sen. Young’s willingness to break rank with Republicans on the safe harbor vote.

"As Americans struggle to save for retirement, it is clear our current retirement system is based on an outdated model,” Young told BenefitsPRO in an email. “While state-based retirement plans are not my first choice, if implemented carefully, they could help close the retirement savings gap and ease the strain faced by our social safety net system. I look forward to working on bold and innovative policy solutions to address this real and ongoing crisis in retirement security."

Moving on without ERISA

Five states have already established programs that create new employer mandates. As states move forward without the safe harbor, they will be operating under the position that their plans are not regulated by ERISA.

Related: A comparison of two state-sponsored retirement plans

“From the states’ perspective, they wanted to provide assurance to those employers that would be required to participate that they would not be establishing an ERISA plan,” said Dominic DeMatties, a partner in Alston & Bird’s employee benefits group practice and a former benefits tax advisor at the Treasury Department.

“The main emphasis was to establish a state-wide program without exposing employers to fiduciary liabilities,” explained DeMatties.

Now, the question of whether states are creating ERISA plans that require employers to be fiduciaries is in limbo, and may ultimately be left for courts to determine, says DeMatties.

A safe harbor for employer-provided IRAs that utilize payroll deductions already exists within ERISA. But it requires that employee participation be completely voluntary.

The difference between the original safe harbor, and the one issued by Labor last year, is the question of automatic enrollment, the plan design feature that the financial services industry and retirement policy experts say is absolutely necessary to optimize participation and savings rates in retirement plans.

“But for auto-enrollment, there is virtually no difference between what is required of an employer under these new state arrangements and the original safe harbor,” said DeMatties.

With the new safe harbor kiboshed, small employers could be put in a precarious position. On the one hand they will be required by state law to participate in the state plans; on the other they may be considered fiduciaries, and exposed to potential liability, if courts rule the state plans are subject to ERISA.

“Will an employer be treated as having established an ERISA plan when all they did was comply with state law? It would not surprise me at all if courts said ‘no,’ these are not ERISA plans, assuming the question is challenged in court,” said DeMatties.

For opponents of state plans that fear government overreach into the private sector, there is a potential irony in the vote to kill the new safe harbor, said DeMatties.

“The safe harbor created the likelihood of standardizing what states do,” he said. “Now, without it, it’s possible some states will push the envelope in how they design programs and potentially create greater diversity in how they regulate participation.”

And if the plans survive potential legal challenges, states could be even further emboldened to create broader participation mandates, said DeMatties.

Vote won’t stop states from moving forward

Up to 30 states have taken at least exploratory steps to establishing retirement plans.

Related: Secure Choice -- for whose benefit?

With the Obama-era safe harbor relegated to the Congressional cutting-room floor, some states may proceed more cautiously.

But ultimately the movement will continue, given the looming implications of savings shortfalls on state budgets, says Cathie Eitelberg, the public sector market director for The Segal Group, which consults states on pension plans.

“States asked for the safe harbor, they thought it was nice to have, but the vote isn’t going to stop them from moving forward,” said Eitelberg. “For states that are not as far along, they were likely to go a bit slower anyway, so they could learn from the experience of the early adopters.”

Eitelberg and other supporters of retirement initiatives at the state level are skeptical of the lobbying efforts of the U.S. Chamber of Commerce and the financial services industry, which claimed the safe harbor eroded retirement savers’ protections.

“It’s pretty obvious the concern was these plans would threaten existing business models,” said Eitelberg of the effort to block the safe harbor.

The financial services industry should be looking at ways to work with states to assist the 40 percent of workers without access to a savings plan through their employers, she said.

“That they are not looking at this situation as a viable opportunity, but as a threat—that is amazing to me,” said Eitelberg. “It is a business opportunity they are squandering.”