Department of Labor Clears Way for State-Run IRAs
By Sarah Brenner, IRA Analyst
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Your state may soon be getting into the IRA business. The Department of Labor (DOL) removed a major hurdle recently, when it issued final rules for state-run IRA programs. The final rules give states a safe harbor from Employee Retirement Income Security Act (ERISA) for state-run IRAs if certain conditions are met.
Retirement Savings Shortfall
According to statistics released by the White House and the DOL, many Americans reach retirement age without enough savings. This is in part because many do not have a way to save for retirement at work. Approximately 39 million employees in the United States do not have access to a retirement savings plan through their employers. Even though such employees could set up and contribute to their own IRAs, most do not. In fact, according to the DOL, less than 10% of all workers contribute to a plan outside of work.
Limited Federal Response
To address these issues, the Obama administration established and expanded the myRA program. myRA accounts are a type of Roth IRA that is designed to be an easy and safe savings option with no fee, and is aimed at individuals without access to a workplace savings plan. However, the administration’s efforts to establish a program that would automatically enroll millions of workers who don’t have access to workplace savings plans in payroll deduction IRAs has never gotten off the ground in Congress.
States Take Action
With no action on the federal level, several states have taken on the task of establishing their own retirement savings arrangements for those workers without access to plans at work. Different states have tried different approaches. California, Connecticut, Illinois, Maryland, and Oregon have adopted laws providing for state-run IRAs. These plans require the establishment of payroll deduction IRAs for workers without access to workplace retirement plans.
One major road block for state-run IRAs has been worries about the scope of ERISA. There have been concerns that state-run IRA programs may be subject to ERISA, despite the express intent of the states to avoid that.
Safe Harbor from ERISA for State-Run IRAs
The final regulations create a safe harbor for states' use to avoid the reach of ERISA for their state-run IRA plans. While the safe harbor is not an absolute guarantee that there will never be a lawsuit, it does significantly lessen the threat of litigation against states who get into the IRA business. To qualify for the safe harbor, the state-run IRA program must meet certain conditions.
Key among those conditions are the following:
- The state must be responsible for investing the employee savings and for selecting the investment alternatives from which employees may choose.
- The state is responsible for the security of worker’s payroll deductions and their savings.
- Employers cannot contribute employer funds to the IRAs. Employers are not allowed to provide a match or make any other types of company contributions.
- Employee participation in the program must be voluntary. If the program requires automatic enrollment, employees must be given the right to opt out.
City-Run IRA Programs
With the safe harbor from the long arm of ERISA now available, you are likely to see more states offering state-run IRAs in the future. The DOL is not stopping there. Coming soon may be city-run IRAs. In response to public comments, the DOL has announced a proposal that would potentially expand the new rules to cover IRA programs run by larger cities and counties.
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