A New Player in the Retirement Industry

“Our issues are becoming more political,” Brian H. Graff, Esq., executive director and CEO of the American Retirement Association, told attendees of the 2015 ASPPA annual conference.

Retirement is front and center, and there is a lot of concern that many people do not have access to retirement plans at work, he explained. “The government finally gets it that retirement plans are important, but now it’s not sure we are the best to deliver those plans,” Graff told retirement plan advisers and service providers.

A movement has started to expand access to retirement plans. Graff noted that it is focused on the same issues as health care reform—lack of coverage, access and costs.

However, while state governments have started the movement, they are not just mandating that employers provide retirement plans; they are creating state products. “It’s as if states are getting into the retirement business,” Graff stated.

Now, the federal government is getting involved. In Interpretive Bulletin 99-1, the Department of Labor (DOL) established a framework for non-Employee Retirement Income Security Act (ERISA) payroll deduction individual retirement accounts (IRAs). According to Graff, as California, Illinois and Oregon worked on their state products, they asked the DOL for clarification that automatic-enrollment does not make payroll deduction IRAs ERISA plans, Graff explained. The DOL was reluctant to respond, but earlier this year, President Obama told the DOL to develop guidance facilitating state programs.

The guidance from the DOL has not been proposed yet, but it is awaiting approval from the Office of Management and Budget (OMB), so it is expected to be published soon. Officials at the American Retirement Association have not seen the guidance, but Graff shared what they’ve gleaned from discussions with the DOL.

It seems the guidance will have two components: a proposal that auto-enrollment IRAs would not be ERISA plans if employers are required to participate—avoiding pre-emption by ERISA, and a rule allowing states to offer open multiple-employer retirement plans (MEPs) that would be treated as an MEP for affiliated employers—meaning, there would only need to be one plan document, one summary plan description and one Form 5500 per year filed. Graff says the first component would be delayed by the proposal, comment period and hearing process, while the second component would be effective immediately.

“This gives a competitive advantage to state products; it’s not a level playing field,” Graff said. In a 2012 advisory opinion, the DOL said an MEP open to unrelated employers does not constitute a single employee pension benefit plan. Graff contended that if the DOL gives states a competitive advantage over private providers, the uneven playing field will lead to less competition, less innovation and worse outcomes for savers.

Judy A. Miller, executive director of the ASPPA college of pension actuaries and director of retirement policy at the American Retirement Association, noted that the DOL is probably wanting to allow states to offer MEPs, because they want something with ERISA protections.

But, Miller notes that there are many problems or unanswered questions about state plans. How will they define participants; what if employees live in different states? How would states be held accountable for and correct errors? Who will run and control investments?

While the DOL guidance may address how these plans should be structured or run, right now it depends on rules set by each state, Miller noted. For example, Illinois issued a request for proposals (RFP) for an investment provider and it has a board that acts as an investment committee. The American Retirement Association is asking that the DOL require a designated service provider, registered with the DOL, to make sure rules are being followed, she said.

Miller also contended that the MEP concept will not work unless there’s an employer mandate to participate. Graff agreed, noting that this movement by states is based on the notion that the retirement industry is not offering a cost-effective solution for small businesses. “There are many cost-effective solutions available. The problem is distribution. It takes time and effort to set up plans for businesses,” he says.

Why would employers jump on board just because a state is providing the product, Miller added.

Miller also noted that the federal government’s Thrift Savings Plan (TSP) has usually followed the trends of the private sector. “States will be laggards; they won’t be ahead of the curve,” she contended.