The House of Representatives voted to scrap Obama-era regulations encouraging states to set up retirement savings plans for private-sector workers, but some states developing such programs plan to move ahead anyway.
“If the Senate votes like the House, Illinois is still going to go forward,” said Illinois Treasurer Michael Frerichs after the House vote on Wednesday. “We have passed the legislation and we have the authority to do this.”
His comments were echoed by state treasurers Tobias Read of Oregon and John Chiang of California.
“We will make sure we can put forward a significant program,” said Mr. Chiang.
Eight states have recently enacted retirement-savings programs for residents without access to a workplace plan, and some 30 more are considering similar measures, according to AARP, the advocacy group for older Americans. It estimates about 55 million full- and part-time private-sector workers in the U.S. lack access to retirement-plan coverage through work.
Seth Perlman/Associated Press Michael Frerichs says ‘Illinois is still going to go forward…we have the authority.’
At issue are the programs approved by five states—California, Oregon, Illinois, Maryland and Connecticut—that require employers to automatically deduct as much as $5,500 a year from employees’ paychecks for deposit into an individual retirement account. Most of these states require companies above a certain size—in Illinois, for example, the threshold is 25 or more employees—to provide retirement-savings coverage. Employers contribute nothing and employees are free to opt out.
The resolutions approved by the House on Wednesday would undo two Obama administration regulations issued last year that make it easier for states and local governments to offer plans that require small businesses to automatically enroll workers in IRAs. Auto-enrollment is considered the key to mass participation in retirement savings plans.
One regulation offered states guidance on how to set up plans and exempt employers who offer payroll deduction plans from tough fiduciary rules under the federal Employee Retirement Income Security Act. That rule would require employers to run plans solely in the best interests of participants or face possible litigation. The move was welcomed by small-business owners, who aren’t generally eager to shoulder the legal liability of being a fiduciary. The other rule allowed cities and counties above a certain size to sponsor their own auto-enrollment plans.
The timing to introduce legislation in the Senate is unclear.
Some in the financial services industry have been critical of the state-sponsored retirement plans, saying they would discourage small businesses from offering their own plans.
The critics include companies that market 401(k) plans to small businesses and might not welcome the competition, says John Scott, director of the retirement savings project at the Pew Charitable Trusts.
The three state treasurers—all of whom are Democrats—predict that if Congress strikes down the Obama-era regulations and states move ahead, court challenges may be filed. The treasurers said they believe courts would ultimately find that the states serve as the fiduciaries, shielding the small employers that are required to participate in the programs from liability.
“I think it’s clear the employers are not running a retirement savings plan,” said Mr. Frerichs of Illinois. “The state is and the state should be the fiduciary.”
States have become motivated to take action on retirement savings because “the people who retire without saving will be users of entitlement programs much sooner and more frequently than those who have saved,” said Mr. Frerichs.
California says 6.8 million people in the state work for employers, mostly small businesses, that don’t offer a retirement plan. In Illinois and Oregon, the numbers are 1.2 million and 1 million, respectively.
Oregon is slated to start rolling out its program out this July. Illinois anticipates its program will debut in early 2018. California’s Secure Choice will go into effect in 2019, says Mr. Chiang.
Mr. Scott at the Pew Charitable Trusts said while the states that have approved retirement savings programs are likely to forge ahead regardless of what happens in Washington, if the measures the House passed Wednesday become law, it could have a “chilling effect” on other states considering auto-enrollment retirement plans.
Write to Anne Tergesen at email@example.com
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