DOL Releases Final Rule on State-Run IRAs

The Department of Labor (DOL) today released its final ruling on state-run individual retirement accounts (IRA)s. The new rule is designed to assist states that have already enacted laws requiring employers that do not offer workplace savings arrangements to automatically enroll their employees in payroll deduction IRAs administered by the states. It also applies to states that have enacted laws creating a marketplace of retirement savings options geared at employers that do not offer workplace plans.

So far, eight states have enacted these kinds of laws. Although other states are considering similar measures, they’ve been hindered by uncertainty regarding the application of the Employee Retirement Income Security Act (ERISA)’s preemption provisions, the DOL argues.

According to the DOL, the rule “provides guidance for states in designing programs by providing a safe harbor from ERISA coverage to reduce the risk of ERISA preemption of the relevant state laws.”

The rule also ensures workers have the choice to opt-out of auto-enrollment arrangements.

In addition, the DOL also released a proposed rule that would help a limited number of cities and other local governments to enact similar measures.

“There is no silver bullet when it comes to solving the retirement savings issues facing workers and the nation, but increasing access to savings opportunities is a crucial step,” says Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi. “Increased access, improved transparency, and reduced conflicts of interest in investment advice are all critically important tools. This agency and this administration have set a course for success in these areas, and we are confident that worker savings will grow as a result of our actions.”

Some in the financial services sector, however, have argued that the prospect of state-run IRAs could force employers to drop existing plans, including those that match worker contributions, among other consequences.

The Financial Services Institute (FSI) today released a statement regarding the new rule: “The financial services industry already provides numerous, reasonably priced retirement savings options for Main Street Americans, including IRAs, which are readily accessible. The leading reasons for not saving for retirement – a lack of income or other pressing financial needs – will not be addressed by state-run plans. We are also concerned that some employers may choose to drop strong existing plans in order to reduce their costs. This would be harmful to impacted workers because state-run plans do not provide for the matching funds that are common in employer-based plans.”

In support of California’s proposed Secure Choice Retirement Plan, the Los Angeles Times editorial board argued that Secure Choice could be a “potential customer, not a would-be rival. Rather than managing retirement investments itself, the board will put that work out for bid by mutual fund companies and other investment firms that already have that expertise.”

According to the DOL, the rule will go into effect 60 days after its publication in the Federal Register. The proposal to expand the safe harbor to include a limited number of larger cities will be open for 30 days of public comment after its publication in the Federal Register, the DOL says. The final rule can be accessed online here and the notice of proposed rulemaking can be accessed here.