APA Offers State Retirement Plan Recommendations
By Alice P. Jacobsohn, Esq.
In the past few years, 27 states introduced legislation with a variety of approaches to providing retirement plans for employees who don't have access to employer-sponsored plans. APA's Government Relations Task Force Subcommittee on Retirement Accounts offers state leaders recommendations on the role of employers in these plans, especially when they mandate payroll deductions. APA's intent is to provide interested stakeholders in state and local governments with practical advice without recommending that governments undertake a plan or implement any particular plan approach.
Oregon implemented the first phase of its mandatory, automatic enrollment payroll deduction plan in July after considering recommendations made by APA. Currently, APA's subcommittee is participating in an advisory committee to implement California's plan. Connecticut, Illinois, Maryland, and Massachusetts are not far behind. Vermont unveiled a multiple employer voluntary plan this summer. Washington and New Jersey are implementing marketplace plans in which employers are encouraged to sponsor plans for their employees.
In July, APA's GRTF subcommittee finalized a communications report with recommendations for state and local decision-makers. The information covers important issues regarding government-sponsored retirement savings plans, considering the full life cycle of an employee from new hire to termination or retirement. The report, State Retirement Savings Programs: Employer Communications, is available on APA's Website at http://info.americanpayroll.org/pdfs/gov/GRTF-RA-State-ER-Report.pdf.
“Electronic systems for communication are preferred, including information about the retirement savings plan, enrollment forms, opt-out forms, acknowledgement statements, notices of employee participation, and notices on the percentages or amounts of distribution from employees' wages," the subcommittee said. Because these retirement programs are not employer-sponsored, states must assume responsibility for developing information about their plans, although employers may play a role in explaining the opt-out nature of a program and open enrollment periods. Ideally, employees will be able to interact directly with state administrators and financial managers, minimizing the role of employers.
In addition, once state legislation defines which employers and employees are eligible, affected employers will require a means to report basic enrollment information (e.g., contact information). This requires sufficient time. States can reduce the time through public announcements about the program. Employers also will need time to reconfigure or add software systems and make adjustments to payroll processes. APA recommended six to 12 months.
A real concern for employers is potential liability associated with these state-sponsored plans. Therefore, APA is asking states to carefully consider employee acknowledgements about program information and to protect employers from penalties if an employee refuses to sign a required plan form. When problems arise from formatting or inaccurate information, such as a name and social security number mismatch, the state's program should include a reasonable correction process with sufficient notice to employers. Employers and employees must clearly understand the schedule for employee retirement account changes, especially if a state plan includes automatic escalation provisions.
Retirement Plan Interest
Recent action by Congress and the Trump administration shows a policy to reduce the role of the federal government in retirement planning, but states are forging ahead because they see themselves as ultimately responsible for struggling retirees. This is a significant state budget issue. For example, a 2016 Segal Consulting study found a positive correlation between increased retirement savings and reductions in state Medicaid costs. With fewer people living in poverty at retirement, reductions in Medicaid payments can amount to millions of dollars in each state.
Federal activities include an announcement by the U.S. Department of the Treasury in July to phase out the “my Retirement Account" or myRA® program with a first step to no longer accept new enrollments. This program, developed under the Obama administration in 2014, was designed for individuals who did not have access to a retirement plan at work and was voluntary for employers and employees. With only about 30,000 participants for a total contribution of $34 million, Treasury concluded that the cost of the program was unjustified.
In a letter to Treasury Secretary Steven Mnuchin on August 1, Senate Finance Committee Chair Orrin Hatch expressed appreciation for ending the program. He questioned the validity of the program created with funds Congress did not designate for this purpose. He also raised concerns about the program regarding risks for employers, private-sector financial firms, and Treasury Department officials. These risks, Hatch said, came from an opinion by the U.S. Department of Labor (DOL) that he believes incorrectly concluded the myRA program was not subject to the Employee Retirement Income Security Act (ERISA).
“The opinion and accompanying discussion by the DOL official, in my view, are deeply flawed along many dimensions," Hatch said.
In addition, in 2016, the DOL published a safe harbor rule specifically exempting states from certain ERISA requirements under state-sponsored retirement plans with the intent to encourage state planning. A similar proposed rule was published for state political subdivisions. Congress eliminated both of these rules this past spring through resolutions under the Congressional Review Act (H.J. Res. 66 and H.J. Res. 67). However, many state administrators believe their plans either are in compliance with ERISA or that ERISA doesn't apply.
Nationally, Pew Charitable Trusts reports that 58% of workers have access to employer-sponsored retirement plans and 49% are participating. These rates vary based on location, industry, gender, wage amounts, race, ethnicity, age, and employer size. Despite even these levels of access, the National Institute on Retirement Security reports that the median account balance is $3,000 for working households and $12,000 for near-retirement households.
Alice P. Jacobsohn, Esq., is Senior Manager of Government Relations for the APA.