Compliance March 8, 2017

State-Based IRAs Help States Save on Medicaid

Those standing in favor of state-based IRA programs include many retirement plan advisers and other service providers. 

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GOP lawmakers in the House and Senate are moving to dial back Department of Labor (DOL) rules adopted under former President Barack Obama that encourage states to set up individual retirement account (IRA) payroll deduction retirement programs for private sector workers whose employers do not offer tax-deferred workplace savings opportunities.

Given the recent Republican sweep of the federal government, it seems likely the lawmakers will eventually succeed if they remain focused on the effort. Just this week Senator Orrin Hatch, R-Utah, well known for his work on pension and retirement issues, introduced a joint resolution in the Senate “disapproving the rulemaking,” matching a previous move in the House.

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Their concerns, broadly stated, are that small businesses will be discouraged from offering their own retirement plans to employees, and that employees put into state-run plans will not have the protections of the Employee Retirement Income Security Act (ERISA) and will have limited control over their retirement savings. It remains to be seen how such a seemingly pro-ERISA stance will be squared with the parallel effort among GOP lawmakers and the executive branch to overturn the DOL fiduciary rule, which would have the effect of broadly expanding ERISA’s protections to IRAs. 

As the Republican Congress seeks its footing, there are still many who are arguing in favor of the Obama-era rules—and not just opposition Democrats. Those standing in favor of state-based IRA programs include many retirement plan advisers and other service providers. 

According to research provided by Segal Consulting, one powerful argument they are sharing with Congressional leaders is that state-based IRA programs can allow private sector workers to enhance their retirement security while the state also saves on Medicaid costs because fewer people would need to rely on Medicaid. The savings on Medicaid, some argue, can even go a long way to offset the cost of the IRA programs in the first place.  

“With retirement savings falling short of what many workers need, several states have taken steps to establish workplace individual retirement account programs for workers who do not have access to an employer sponsored retirement plan,” the firm explains. “These states are also asking how a population better prepared for retirement would affect public safety-net programs. Of most interest, given its growing presence in state budgets, is Medicaid, where there are clear potential savings.”

NEXT: Serious savings for the states 

Segal Consulting conducted a review of all 50 states and the District of Columbia “to estimate the impact of expanded retirement savings by individuals not currently participating in a retirement plan on future Medicaid expenditures.” The analysis clearly showed a positive correlation between increased retirement savings, “sufficient to remove a percentage of currently vulnerable households from the poverty rolls by the time they retire, and a related reduction in Medicaid spending.”

Segal argues that “every state had an estimated reduction in state Medicaid expenditures resulting from increased retirement savings from the first 10 years of the plan.”

“Fifteen states would save more than $100 million each, with total projected savings approaching $5 billion,” the firm suggests. “The savings ranged from $11 million in Mississippi to $604.7 million California.”

“This study shows states could realize meaningful savings on Medicaid spending when a  retirement savings plan is  available  to all  private sector workers,” agrees Cathie Eitelberg, senior vice president and director of public sector consulting at Segal. “The majority of jurisdictions have yet to consider this option, but should at least start to evaluate the feasibility of such a program from a cost/benefit perspective.”

The full Segal Consulting analysis is available for download here. 

Compliance March 7, 2017

Connecticut Bill Targets 403(b) Provider Conflicts

A new bill is aimed at implementing a state-based rulemaking process that will require any person who enters into a service contract or agreement with a 403(b) retirement plan to disclose conflicts of interest. 

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A bill introduced in the Connecticut State Legislature would order the State Treasury to establish a new set of regulations “guided by the United States Department of Labor’s Final Rule concerning contracts or arrangements under Section 408(b)(2) of the Internal Revenue Code of 1986 published in the Federal Register of February 3, 2012.”

The bill is aimed at implementing a state-based rulemaking process that will require any person who enters into a service contract or agreement with a 403(b) retirement plan and “reasonably expects to receive $1,000 or more in compensation, direct or indirect, in connection with the provision of such services,” to disclose to a fiduciary of the plan “any conflict of interest such person has with such retirement plan.”

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This was the main thrust of the 2012 regulation from Department of Labor (DOL), but now it seems the Connecticut Legislature also wants to play a more active role monitoring (and potentially policing) 403(b) service providers working within the state.

As the text of the Connecticut bill lays out, new regulations would apply to any retirement plan created under Section 403(b) of the Internal Revenue Code of 1986, “or any subsequent corresponding internal revenue code of the United States, as amended from time to time, that is not regulated under the Employee Retirement Income Security Act of 1974, as amended from time to time.”

Disclosures “shall include, but need not be limited to, a description of services to be provided to the retirement plan pursuant to such contract or agreement, the compensation such person or an affiliate or subcontractor of such person expects to receive as a result of such services, and any direct or indirect compensation that such person or an affiliate or subcontractor of such person expects to receive in connection with termination of such contract or agreement.”

The bill would also establish that the Connecticut Department of Treasury, in consultation with the Comptroller, “shall adopt regulations, in accordance with the provisions of chapter 54 of the general statutes, to implement and administer the provisions of this section. Such regulations shall be guided by the United States Department of Labor’s Final Rule concerning contracts or arrangements under Section 408(b)(2) of the Internal Revenue Code of 1986 published in the Federal Register of February 3, 2012.” 

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