man holding card with IRA on it As in Oregon, California, and Illinois, workers havethe ability to opt-out of the New Jersey savings plan after theyare automatically enrolled. (Photo: Shutterstock)

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A version of New Jersey's Secure Choice Savings Program Actamended by the Garden State's Senate passed the General Assembly onMonday by a 55 to 18 vote.

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The bill, which establishes an automatic IRA retirement savings programadministered by the state, now moves to Gov. Phil Murphy's desk,who is expected to sign it into law.

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New Jersey is the latest to move forward with state-administered IRAs, which are designed toaddress the access gap to workplace retirement plans in the privatesector.

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Businesses that employ at least 25 workers and do not offer aprivate-sector retirement plan will be required to enroll workersin IRAs in New Jersey. Businesses with fewer than 25 workers willbe allowed, but not required, to enroll workers in the plan.

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Oregon is furthest along a phased rollout ofits auto-IRA plan, which will be competed by May of 2020. As ofSeptember 1, 2018, Oregon had 1,160 employers enrolled in its plan,accounting for 39,284 employees. Monthly contributions to Roth IRAsaveraged about $100, and total assets in the program were more than$6.7 million, according to Ascensus, record-keeper to the Oregon'splan.

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California and Illinois are in the midst ofrolling out their state-IRA programs.

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Like those states, New Jersey's legislation includes languagethat sets parameters for the types of investments that can beoffered. New Jersey's plan will offer no more than five investmentoptions. Eligible workers will be defaulted into a target-date fundat 3 percent of salary if they do not select an investment orsavings rate on their own.

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And as in Oregon, California, and Illinois, workers have theability to opt-out of the savings plan after they are automaticallyenrolled.

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The opt-out provision is central to the states' claims thatenrollment in the plans is voluntary. An existing Labor Departmentsafe harbor protects employers from fiduciary liability ifenrollment in IRA savings plans is “completely voluntary” andemployers do not contribute to the plan.

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The Obama administration crafted an updated safe harbor thatextended to employers that automatically enrolled workers intoIRAs, so long as employees had the ability to opt-out of theplans.

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But Senate Republicans narrowly scuttled that safe harbor in2017.

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An ERISA plan or not?

States nonetheless proceeded with auto-IRA plans after thataction. Last May, a California-based taxpayer advocacy, the HowardJarvis Taxpayers Association, sued CalSavers IRA program in federalcourt, alleging the program violates the Supremacy Clause of theU.S. Constitution.

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At issue in the claim is the question of whether the CalSaversprogram is preempted by the Employee Retirement Income SecurityAct, a federal law.

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Legislation that has advanced programs in New Jersey and theother states includes explicit language that says the programs arenot employer-sponsored plans and are not operated or administeredby employers.

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“A participating employer shall not be a fiduciary, orconsidered to be a fiduciary,” says New Jersey's bill. Under ERISA,employer sponsors of retirement plans are fiduciaries.

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New Jersey's bill also instructs the board overseeing its planto request confirmation from the Labor Department that ERISA doesnot preempt the state-IRA plan.

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“The board shall not implement the program if the IRAarrangements offered under the program fail to qualify for thefavorable federal income tax treatment ordinarily accorded to IRAsunder the Internal Revenue Code or if it is determined that theprogram is an employee benefit plan and State or employer liabilityis established under ERISA,” according to language in the law.

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How California's lawsuit could impact other state plans

The Howard Jarvis Taxpayers Association petitioned the U.S.District Court for the Eastern District of California to blockimplementation of CalSavers. CalSavers subsequently filed a motionto dismiss HJTA's petition.

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The court requested supplemental briefs from both parties, whichwere submitted last November.

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ERISA “does not allow state-run retirement programs for privateemployees,” according to HJTA's original complaint.

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“We remain confident that we are on strong legal ground,” JohnChiang, California's Treasurer, said in an email to BenefitsPROlast year.

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The issue of ERISA's preemption over CalSavers and other stateplans raises a novel legal question, say attorneys.

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“It is definitely not an open and shut matter,” said DominicDeMatties, a partner at Alston & Bird and former benefitscounsel at the Treasury Department, in a previous interview. “Thereare good arguments to be constructed on either side of thiscase.”

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A ruling in favor of HJTA is all but certain to result in anappeal by Treasurer Chiang and other California officials named inthe suit, say attorneys, potentially leaving the question of thelegality of state-administered IRA plans unanswered as statescontinue phased rollouts of programs, and others considerimplementing plans.

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New Jersey's law says its Secure Choice program will beimplemented within 24 months of enactment of the law in two rolloutphases, beginning with larger employers that don't offer retirementplans, according to language in the law.

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READ MORE:

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Preferred recordkeeper to state IRA planssays enrollment in Oregon better than expected

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Would employers drop DC plans for state-runplans?

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8 states, 8 state-sponsored retirementplans

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