Several months ago, when the
retirement industry was chiefly absorbed in the Department of Labor’s proposed conflicted
advice regulations, a colleague commented that many would be surprised by soon-to-be-released
guidance on state-based retirement savings programs. True to this prediction, the guidance issued
on November 18th by the DOL’s Employee Benefits Security
Administration (EBSA) has given us all something more to ponder, and – at the
risk of being called alarmist – perhaps to be quite concerned about.
As hinted at by Labor Secretary
Thomas Perez shortly before the November guidance was released, the agency issued
both proposed regulations on state-mandated payroll withholding IRA programs,
and also sub-regulatory guidance – Interpretive Bulletin 2015-02 – on state-coordinated
ERISA-type plans. FAQs accompanied the
release, as well.
A small minority of states, at
least until now, have shown interest in becoming involved in ERISA-style
retirement plans for private sector employers and their workers. This may change as the new EBSA guidance is
digested, especially given the DOL’s very accommodating stance in Interpretive
Bulletin 2015-02, offering several options for state involvement in ERISA plans
for private sector employers. This
prospect should be of major concern to practitioners and providers in the
employer-sponsored retirement plan space.
It’s hard to fault state
legislators and policymakers for taking the initiative on behalf of “plan-less”
private sector workers within their borders.
They’ve watched the senators and congressmen they sent to Washington unable
to make progress in broadening or enhancing options for their citizens to have
greater retirement security. If
something is going to happen, the states’ seem to be concluding that they will
have to act on their own instead of waiting for Congress.
I have to remind myself that those
in the Department of Labor who drafted this guidance no doubt have good
intentions and defensible motives. They want
to see more Americans better prepared to enter their retirement years with
adequate financial resources. But intentions
and motives do not by themselves make good guidance or policy.
Reasonable minds may differ regarding
the things government should manage in a free market economy like ours. But – such philosophical differences
notwithstanding – is there any reason to expect that a state will do a better
job of managing a retirement program than the private sector? A number of states’ and other governmental
units’ pension systems are in woeful shape.
There also is no shortage of examples of unprincipled use of political power
and influence at the state level. Can we
be assured that this will not spill over into the administration of a
state-sponsored retirement plan encouraged by this guidance? One of the reasons ERISA was enacted was to
provide both fairness and uniformity in the administration of retirement plans,
and there is little reason to expect that every state will do an equally good
job of it.
But, even if we accept the
premise that state government-coordinated retirement programs for private
sector workers are a reasonable way to broaden coverage and participation,
there are parts of this DOL guidance that don’t pass muster. The industry is justifiably asking how the
agency could have reached some of its conclusions about acceptable state plan
structures.
For instance, DOL takes the
position that a state government could set up what would be called an “open
MEP,” a multiple employer plan for employers that have no common interest,
purpose, or ownership. This is something
that DOL has expressly and aggressively forbade in such recent guidance as Advisory
Opinion 2012-04A. In that 2012 guidance
DOL maintained that in order to establish a MEP, the participating employers
must have “substantial common control, ownership or organizational
connections,” or “substantial economic, business or representational purpose”
in common.
Advisory Opinion 2012-04A further
asserted that an unrelated coordinator of a MEP – such as a third-party
administration (TPA) firm – would lack legitimacy if the only interest it held in
the arrangement was for the purpose of providing benefits to the participating
employers. In that guidance DOL did, in
fact, deny just such a firm’s request for approval of a proposed open MEP,
citing the fact that there was “no employment-based common nexus or other
genuine organizational relationship between the employers.” This sounds like the very role that a state might
be playing under a MEP option blessed by DOL in Interpretive Bulletin 2015-02.
In legitimizing its new state-coordinated
MEP option, DOL relied on a different argument in Advisory Opinion 2012-04A, one
which stated that those sponsoring or maintaining the plan had to be tied to
the participating employers “by genuine economic or representational
interests.” DOL now declares in Interpretive Bulletin
2015-02 that “a state has a unique representational interest in the health and
welfare of its citizens that connects it to the in-state employers that choose
to participate in the state MEP.” Done
and done!
There are also legitimate
questions to be asked about the alternative DOL-approved options for state-coordinated
ERISA plans. Such as, do we want state
governments deciding which service providers they will favor by including then in
a state-approved retirement plan “marketplace?”
Do we want a state to sponsor a prototype plan document and offer it directly
to employers, essentially competing with private sector firms that offer
prototype documents and the services that go with them?
Right now, there are more
troubling questions than there are reassuring answers.
