The Department of Labor is easing the way for states to create their own retirement plans for private sector workers, in a bid to improve the retirement outlook for millions of Americans who have inadequate savings.
The latest moves which are — announced today — build on initiatives such as the fiduciary rule, which are remaking the regulatory landscape for retirement plans and advice just as millions of baby boomers near the end of their careers
"We need to fortify the pillars of retirement," Secretary of Labor Thomas Perez said Thursday during a conference call.
Financial planners may soon begin advising more clients on whether to take advantage of a state-run plan. For Liz Miller, president of Summit Place Financial Advisors in Summit, N.J., the emergence of such plans is a welcome trend.
"So many economists tell us the engine of U.S growth and employment is small businesses, but they often can't afford to offer qualified retirement programs," she says.
Less than one third of Americans between the ages 65 and 74 have savings in a retirement account, according to White House officials. Americans who have such accounts have a median savings balance of $49,000.
Perez praised the efforts of eight states, including California, to create state-run retirement plans for Americans who do not have access to similar plans through their employers.
"Millions of Americans are working at a job where they don't have a retirement savings vehicle in the workplace," Perez said. "Historically, a work-based savings vehicle was a pillar for retirement."
RULES OF THE GAME
The Labor Department's new rule aims to expand Americans' access to tax-advantaged retirement savings plans, by clarifying the regulatory rules that would govern state-run plans.
In order to qualify as a non-ERISA plan, a state-run program would have to be established and administered by the state; provide a limited role for employers; and be voluntary for employees.
State governments had requested regulatory clarification, according to Perez, which he addressed during the call.
“This regulation does not prevent a state from establishing an ERISA plan. There is nothing to stop a state from doing that," Perez says. "The eight states to which I am referring to, have chosen a different route. Their concern as expressed to me was: How can we establish this voluntary plan in such a way that will not run afoul of ERISA?"
Quote"We have tens of millions of people who don't have access to retirement savings right now. If we do not address that issue as a society, then these people will not retirement in dignity," says Secretary of Labor Thomas Perez.
State-run programs could fill a niche by offering 401(k)-type access to employees of firms too small to offer such programs themselves, says Summit Place’s Miller.
"If your employer doesn't offer a qualified plan, most people can only save up to $5,500 in an IRA. In contrast, a 401K plan allows employees to defer up to $18,000. Both these amounts can reduce taxable income, so the employee of a small business is at a disadvantage," Miller says.
Some industry trade groups have previously criticized state-run plans for competing with private sector options.
FSI said Thursday that it was reviewing the Labor Department's latest proposal, but believes "the costs and time required for administration of the plans will prove overly burdensome for small employers and state governments."
The department also proposed an addition to the rule allowing cities to create similar retirement savings plans if they are in a state that lacks a statewide retirement savings program for private sector employees. Under the proposal, the initiative would be limited to cities with populations at least equal to the least populous state, Wyoming, which has about 582,000, according to the U.S. Census.
More than 30 cities had populations greater than that of Wyoming, according to census data.
The department is soliciting comments from the public on the proposal.
FIDUCIARY RULE TARGETED
Meanwhile, industry trade groups have engaged in three lawsuits to block the Labor Department's other key initiative, a rule imposing a fiduciary obligation on brokers advising clients on retirement assets.
Oral arguments in a suit brought by the National Association of Fixed Annuities were heard Wednesday in a Washington federal court. Arguments in a second case brought by several groups, including the U.S. Chamber of Commerce, SIFMA and FSI, have yet to be heard in an Austin, Texas, federal court. A third case is also pending.
The Labor Department is defending itself in all three cases. Perez reiterated that the department conducted a thorough six-year rule-making process, amended the final regulation in response to industry feedback and has always possessed the authority to craft new regulations affecting retirement savings.
Perez also said that the department's latest rule compliments the objectives of the fiduciary rule: expanding and protecting Americans' retirement futures.
"We have tens of millions of people who don't have access to retirement savings right now. If we do not address that issue as a society, then these people will not retirement in dignity," Perez said.
The consequences of not doing so, he said, would leave the nation millions of retirees "relying on public assistance just to survive."