Congress reverses rule on state retirement plans

The Treasury Secretary explains MyRA: A 'starter' retirement account
The Treasury Secretary explains MyRA: A 'starter' retirement account

Congress repealed an Obama-era rule Wednesday that had paved the way for states to create their own retirement savings plans for private sector workers.

The rollback is expected have a chilling effect on the plans already underway in seven states, but won't necessarily halt them. California, Connecticut, Illinois, Maryland, New Jersey, Oregon, and Washington have already adopted legislation to create new savings programs, while lawmakers in at least a dozen other states are considering similar plans.

But the repeal will undermine the previous administration's efforts that encouraged states to create new ways to address the national retirement savings crisis.

The rule was created by the Department of Labor under President Obama to exempt state-run IRA plans from the Employee Retirement Income Security Act (ERISA), which sets standards for benefit plans established by an employer. But ERISA also presented obstacles for states to run their own plans.

Oregon Treasurer Tobias Read has said that his state doesn't necessarily need the exemption from ERISA to proceed, but that he viewed it as an advantage to have additional clarity on the rules.

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The new state-sponsored IRA plans aim to help small businesses offer retirement plans to their workers by providing a less costly alternative to what's currently available.

Nearly half of all working Americans -- about 55 million people -- don't have access to a plan like a 401(k) at work. Without access to a plan that deducts savings directly from their paycheck, workers are much less likely to save.

Though the details vary by state, the basic model is to automatically enroll private sector workers who don't have a retirement plan through their jobs into a state-sponsored IRA, with a provision to opt out. The IRA would be vetted by the state, but provided by a private firm.

Opponents say the ERISA exemption strips Americans of federal consumer protections and imposes a new burden on employers by creating a patchwork of laws across the country.

"I can only wonder why states think they will be able to produce better results than the private retirement savings system, which has been an unqualified success," said Republican Senator Orrin Hatch on the Senate floor Wednesday.

But those in favor of the state plans say the current system isn't working for small businesses, many of which find it too expensive and cumbersome to offer a plan to their workers. They say the rule would give states the flexibility needed to offer an alternative, low-cost retirement saving option.

Officials from 22 states (both red and blue) wrote a letter to Senate Majority Leader Mitch McConnell asking him to vote against repealing the rule.

"The Obama administration acted to allow states to pursue these initiatives by exempting them from overreaching federal regulations and then providing necessary consumer protections. That's what people want," said Senate Democratic Leader Chuck Schumer.

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If Oregon's plan goes through, workers will have three investment options to choose from. Accounts will be treated like a Roth IRA in regards to contribution and withdrawal rules, meaning they'll be funded with after-tax dollars, but withdrawals in retirement will be tax free. Businesses that fit the criteria would have to auto enroll their workers, but they can also opt out.

California's plan -- which could cover 7 million workers -- would be similar, but would start by offering workers super safe Treasury bonds as their only investment option.

Some other state plans won't automatically enroll workers in an IRA. Washington, for example, is expected to launch a marketplace that offers different, low-cost savings account options for businesses that want to voluntarily make it available for workers. Those plans aren't allowed to charge employers any fees.

Republicans used the Congressional Review Act to repeal the rule with a simple majority. It's the 14th time they've used the CRA this year to roll back Obama-era rules.

Senator McConnell called them "harmful regulations" that "grew the government at the expense of jobs, wages, and economic growth."

But Schumer said that overturning these regulations has benefited Wall Street instead of working Americans. This one in particular, he said, is a "giveaway" to financial institutions that manage retirement plans that "don't want to see competition from city or state retirement plans"

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Along with House Minority Leader Nancy Pelosi, Schumer asked President Trump to veto the bill. But the president has already signed legislation that overturned a similar rule that allowed cities -- rather than states -- the flexibility to create the auto IRA plans.

Senator Hatch favors a different approach to helping workers save for retirement. He's sponsored legislation that that would allow businesses to voluntarily pool assets and participate in "multiple employer plans."

"I agree that we need to enhance this system to give more workers access and incentives to participate. But, there's absolutely no justification for any effort to reinvent the retirement savings system in order to give primacy to government-run plans," Hatch said.