Compliance December 19, 2016

Municipally Sponsored IRAs Granted Safe Harbor

States were already granted the authority to establish their own IRA programs for private-sector workers; now the largest individual cities are being given the opportunity.
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The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) revealed a final rule to assist large cities and other political subdivisions as they establish payroll deduction individual retirement account (IRA) savings programs for workers who do not have access to workplace savings arrangements.

The rule adds to and amends a similar rule related to state-based savings initiatives published earlier in 2016, further opening up the number of government entities eligible to establish IRAs for private-sector workers. 

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“More workers saving for retirement now means more financially secure retirees in the future,” notes outgoing U.S. Secretary of Labor Thomas E. Perez. “This is good for workers and families trying to build their nest eggs, and good for the long-term strength of the economy.”

Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi adds that “there is no silver bullet when it comes to solving the retirement savings issues facing workers and our nation. Increasing access to savings opportunities, improving transparency and reducing conflicts of interest in investment advice are all critically important policy tools that this administration has pursued.”

According to Borzi and Perez, the final rule published today provides additional guidance for eligible cities and other political subdivisions to help them design IRA programs “by providing a safe harbor describing circumstances in which an employer’s actions in complying with the municipal law do not result in the creation of an Employee Retirement Income Security Act compliant plan.”

As such, the safe harbor will reduce the risk of ERISA preemption of the relevant municipal laws.

NEXT: Details from the latest DOL rulemaking 

According to the DOL and EBSA, by establishing a clear standard, the new rule will also provide greater predictability and certainty to municipalities considering action around implementing IRAs for private-industry workers.

“Importantly, the rule also protects workers’ rights by ensuring they have the ability to opt out of auto-enrollment arrangements,” Borzi says. The rule will go into effect 30 days after its pending publication in the Federal Register.

Under the final rule, a limited number of cities and other political subdivisions, defined as “those with populations at least as large as that of the least populous of the 50 states, that are located in a state that does not already have a payroll deduction IRA plan of its own, that have experience sponsoring a plan for employees, and that meet other criteria laid out in the final rule,” are eligible to enact such a program.

Representatives from three cities—New York, Philadelphia and Seattle—have publicly expressed interest in potentially establishing programs.

The final rule will be published in an upcoming issue of the Federal Register and can also be viewed here. A fact sheet is available here.

Data and Research December 19, 2016

Policy Proposals Could Help Hispanic Workers’ Retirement Outcomes

A report from the Urban Institute shows Hispanics face steeper retirement income challenges than other ethnic groups.
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Hispanics are among the fastest-growing population groups in the nation, nearly quadrupling between 1980 and 2014. Although the Hispanic population is relatively young, the number of Hispanics ages 65 and older will also surge in coming decades. Census Bureau projections indicate that the number of older Hispanics will more than triple over the next 25 years and will account for 15 percent of the older U.S. population by 2040.

A report from the Urban Institute finds many older Hispanics face steep financial challenges because of employment histories marked by low-earning jobs that do not generally offer retirement benefits.

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Shortfalls in earnings and workplace retirement plans earlier in life likely account for much of the financial hardship that many older Hispanics face in retirement, especially those born outside the United States. In 2013, median earnings for men ages 25 to 64 employed full-time were 26% lower for U.S.-born Hispanics than non-Hispanic whites, and 47% lower for foreign-born Hispanics. The earnings shortfall for U.S.-born Hispanic women ages 25 to 64 working full-time, relative to non-Hispanic whites, was much smaller at 15%, but still substantial.

In addition, working Hispanics are much less likely than non-Hispanic whites and non-Hispanic blacks to be offered retirement plan coverage by an employer or to be enrolled in a plan. In 2014, only 32% of Hispanic men ages 25 to 64 employed full-time participated in an employer-sponsored retirement plan, compared with 54% of non-Hispanic white men and 47% of non-Hispanic black men. The comparable rates for women employed full-time were 38% for Hispanics, 57% for non-Hispanic whites, and 50% for non-Hispanic blacks.

However, the fact that Hispanics tend to work longer than other groups promotes their retirement security.

NEXT: Various policy options may improve Hispanics’ retirement security

The Urban Institute also found educational differences partly account for these racial and ethnic disparities in retirement incomes, retirement wealth, earnings and retirement plan coverage. In 2014, 45% of Hispanics ages 65 and older lacked a high school diploma, including 55% of foreign-born Hispanics, compared with 27% of non-Hispanic blacks and 11% of non-Hispanic whites.

However, Hispanics’ generally limited education does not fully explain their financial shortfalls in retirement. Even after the Urban Institute controlled for education, age, marital status and English-speaking ability, researchers found that older U.S.-born Hispanics received 20% less income than non-Hispanic whites, and foreign-born Hispanics received 28% less income. Researchers also found that, among men employed full-time, U.S.-born Hispanics earned 7% less than non-Hispanic whites and foreign-born Hispanics earned 14% less.

The Urban Institute says more research is needed to better understand why Hispanic workers in the U.S. tend to earn less than non-Hispanic whites, and why they are less likely to participate in employer-sponsored retirement plans.

However, the Urban Institute’s projections suggest that retirement incomes will grow over the next three decades for both U.S.-born and foreign-born Hispanics. Compared with median age-70 income for people born in the 1940s, who are reaching age 70 in the 2010s, researchers project that median age-70 income for people born in the 1970s will be 42% higher for U.S.-born Hispanics and 38% higher for foreign-born Hispanics.

The Institute suggests various policy options might improve retirement security for Hispanics. Workforce development initiatives and efforts to promote education could enhance skills and raise earnings, boosting future Social Security benefits and allowing more Hispanics to save for retirement. Policy initiatives that promote retirement savings, such as state mandates requiring employers to offer automatic payroll deductions that would fund retirement accounts, could help narrow racial and ethnic disparities in retirement savings. Social Security reforms that increase benefit progressivity or create a meaningful minimum benefit would raise retirement incomes for people with low lifetime earnings. Finally, support for family caregivers and better financing options for paid long-term services and supports could help the many older Hispanics with disabilities and cognitive impairment receive the care they need and ease the financial burdens on their families.

The report examines Hispanics’ retirement security, using nationally representative household survey data from multiple sources, including the American Community Survey, decennial censuses, Survey of Income and Program Participation, and Health and Retirement Study. The analysis also used the Urban Institute’s Dynamic Simulation of Income Model (DYNASIM4) to project the financial security of future generations of older Hispanics.

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