Compliance August 13, 2019

U.S. Considering Whether to Join Lawsuit Over California Secure Choice Program

The lawsuit alleges the act that created the Secure Choice program “violates the Supremacy Clause of the United States Constitution because it is expressly preempted by the Employee Retirement Income Security Act of 1974.”

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The United States is considering joining a lawsuit challenging the establishment of the California Secure Choice Retirement Savings Program.

The Howard Jarvis Taxpayers Association (HJTA) filed the complaint last year in the United States District Court for the Eastern District of California. The lawsuit alleges the act that created the Secure Choice program “violates the Supremacy Clause of the United States Constitution because it is expressly preempted by the Employee Retirement Income Security Act of 1974.”

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A notice filed with the court and signed by Trial Attorney Christopher R. Healy with the U.S. Department of Justice says, “The United States may have an interest in providing its views with respect to that issue and is actively considering whether to participate.” The notice requests that the court defer ruling on the pending motion to dismiss in order to afford the United States an opportunity to complete the authorization process and determine whether to participate in the litigation.

The notice explains, “This approval process generally takes several weeks, but it can vary depending upon the Assistant Attorney General’s workload and availability. The United States is aware that Defendants’ motion to dismiss is fully briefed, and it intends to work expeditiously to complete the process of determining whether to participate in this lawsuit.”

According to its supporters, the California Secure Choice Retirement Savings Program is meant to provide a voluntary, low-risk, auto-enrollment retirement savings plan for many uncovered workers in the state who would otherwise have little opportunity to start saving in a constructive way. According to detractors, such as HJTA, the program will most likely prove to be an expensive experiment that does little to actually improve retirement savings adequacy in the state.

However, recent data shows OregonSaves, the first state-facilitated payroll deduction individual retirement account (IRA) program in the nation to launch, has demonstrated success by a number of measures. It reports more than seven in 10 workers have elected to stay in the program; workers are saving at a higher percentage of pay than anticipated (an average of $117 per month); and so far, $25 million has been saved by workers who were not saving before.

In addition, Kasey Krifka, engagement director of the Oregon Savings Network, with the Oregon State Treasury, tells PLANSPONSOR that OregonSaves became self-sustaining in July 2019, years sooner than initially planned, which means the state of Oregon and the people of Oregon are benefiting from an important program at less cost than initially projected, and with no additional loans or general fund support.

The HJTA filed its compliant less than a year after the Trump administration and Congress cancelled an ERISA safe harbor established by the Obama administration, which was meant to prevent this very preemption issue. By issuing a new final rule, “Definition of Employee Pension Benefit Plan Under ERISA,” the Department of Labor’s Employee Benefit Security Administration (EBSA) removed its final rule regarding the Employee Retirement Income Security Act (ERISA) safe harbor of government-run plans for private-sector workers from the Code of Federal Regulations.

The notice filed in the California Secure Choice litigation says the United States will update the court on the status of its consideration to participate in the lawsuit by August 30.
Opinions August 13, 2019

How a More Strategic Eye on Retirement Plan Design Can Alleviate Readiness Issues

As a growing number of America’s aging workers delay retirement, employers should consider applying a multiyear strategy alongside their 401(k) plan to find ways to improve their employee’s ability to retire on their own terms and minimize the higher costs associated with those who are forced to keep working.
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Our retirement readiness is a shared concern. More than half of Americans who are now in their 60s are putting retirement off—56%, in fact—a notable rise from the 46% who delayed it 1996.[1] While this group is somewhat more confident about being able to finance their retirement than five years ago, one study[2] shows, they can’t shake the fear of running out of money when the markets are volatile and medical costs continue to climb.

This, in turn, creates concerns for their employers. Costs are one issue, of course—e.g., the wage differential between older and younger workers, and the generally higher health care costs that older employees incur. But employers aren’t confident that their workers’ retirement savings will last as long as it should.

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Taking a more strategic approach to retirement plan design, with an eye on improving participation and getting your employees to save more can make a big difference. Many organizations neglect the long view once they have the basics of their retirement plan taken care of—e.g., choosing appropriate funds, making sure they’re competitive from a fee standpoint, and forming and Investment Committee that regularly reviews plan performance.

But a retirement plan isn’t a one-and-done kind of thing. At various stages of the plan’s evolution, there are various features and activities that employers and their plan advisers should consider evaluating and phasing in over time. They will go a long way toward meeting everyone’s needs in preparing for retirement.

They include:

  • Automatic Enrollment and Automatic Escalation. These 401k plan design features are quickly becoming the norm. Implementing automation has proven to significantly improve retirement outcomes for those employees who may need a nudge in the right direction. Auto-enrolling new hires and slowly increasing their deferral rates on an annual basis (auto-escalation) may seem a little paternalistic, but the pros of this strategy significantly outweigh the cons. Employees are set in motion early towards meeting their personal retirement goals, and employers avoid having a costly and aging population that would retire if it was a viable option.
  • Tech tools and the enhanced employee experience. It’s critical from the outset to give employees access to high-quality tech tools for managing and monitoring their investments. That means fast, easy online access to check on the status of investments and the latest apps for financial planning. Technology is now one of the most important considerations in selecting a retirement plan partner, given its appeal to a younger workforce who prefer a digital experience.
  • Education. Equally important is educating employees on how to get the most out of their DC plan—and the message must be consistent and ongoing over time. If your people are not engaging with the educational programs you offer, you need to find out why. You’ll get the best participation when you understand and respond to your workers’ preferences on topics, timing and format—tailoring your education programs to meet their particular needs.
  • Plan structure considerations. Look to gain strategic value from your fiduciary partners by requesting guidance. This could be, for instance, asking how to tweak plan design for better results, be it to improve participation or fix issues. One thing to think about is your contribution matching strategy. Matching formulas vary, and some employers put a cap on their match, which can affect participation. That makes match forecasting worth considering as a way to budget what is often the largest expense associated with your plan, but also can spur participation. A match typically isn’t worth doing if it isn’t incentivizing employees to save and to help propel the plan’s growth. Plan committees should also continually look to implement automated features, perhaps add a Roth component, or provide executive benefits such as a deferred compensation plans for certain key employees.

When the retirement plan has been set up and managed strategically over time, everyone’s interests will be served and retirement readiness will be more than just another benefits buzz-term. It will be a reasonable—and achievable—aspiration of your employees.

 

Jason Smith is vice president of retirement plans at Hub International Investment Services Inc.

This feature is to provide general information only, does not constitute legal or tax advice and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services (ISS) Inc. or its affiliates.

[1] https://www.cnbc.com/2018/04/27/delayed-retirement-is-in-the-cards-for-more-than-half-of-60-somethings.html

[2] https://www.aicpa.org/press/pressreleases/2019/going-broke-remains-top-concern-in-retirement.html

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