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DOL Publishes Final Rule on State-Run Retirement Programs

The Labor Department’s final rule outlining the circumstances in which state retirement savings programs would not be treated as creating ERISA-covered pension plans is out. The final rule largely mirrors the proposed rule, while offering some clarifications in response to submitted comments.

States’ Roles

As expected, most of the new safe harbor’s conditions focus on the state’s role in the program. The final rule clarifies that the state-run program must be established by state law, implemented and administered by the state (though the state may choose to contract with service providers to administer the program). The state must be responsible for investing the employee savings, for selecting investment alternatives from which employees may choose, and for the security of payroll deductions and employee savings.

Employer Role

Employers may not contribute to these programs, and their participation in the program must be required by state law, not voluntary. Additionally, employer activity must be limited to ministerial activities such as:

  • collecting payroll deductions;

  • remitting them to the program;

  • providing official state program notices to employees (this is a may, not a must);

  • maintaining records of payroll deductions and remittance of payments;

  • providing information to the state necessary for the operation of the program; and

  • distributing state program information to employees.

The program must be voluntary for employees even if it requires automatic enrollment. Consequently, employees must be given adequate advance notice and have the right to opt out. In addition, employees must be notified of their rights under the program and how to enforce their rights.

Municipality Extension?

Additionally, the Labor Department also announced a proposed regulation that would expand the final rule discussed above to cover qualified city and county programs. To be qualified, the city or county must have the authority to require employer participation in a payroll deduction savings program. In addition, the city or county must have a population at least equal to that of the least populous state, and may not be in a state that has a state-wide retirement savings program for private-sector employees.

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The proposal solicits comments on, among other things:

  • whether the final rule should be expanded in this manner;

  • what limitations should be imposed on the size or types of political subdivisions that would qualify; and

  • whether the final rule’s conditions should differ in any way if applied to political subdivisions.


The final rule clarifies that it does not by its terms prohibit states from taking additional or different action or from experimenting with other programs or arrangements. Additionally, it removed restrictions that would have prohibited states from imposing any restrictions, direct or indirect, on employee withdrawals, citing commenters concerns that:

  • It would interfere with the states’ ability to guard against “leakage” (and, since “the states deal directly with the effects of geriatric poverty, they have a substantial interest in controlling leakage, and the proposal’s prohibition against withdrawal restrictions could undermine that interest,” according to the DOL).

  • It would interfere with the states’ ability to design programs with diversified investment strategies, including investment options where immediate liquidity is not possible, but where participants may see better performance with lower costs.

  • It could interfere with the states’ ability to offer lifetime income options, such as annuities.

The final regulation also removed restrictions on reimbursement to employers of costs, limiting that to a reasonable approximation of the employer/typical employer’s costs.

Unlevel Playing Field

Back in January, the American Retirement Association submitted a comment letter to the Department of Labor with respect to those proposed regulations. In the comment letter, the ARA made the following recommendations:

  • That the non-ERISA safe harbor under the proposed rule be expanded to apply to comparable payroll deduction programs established and administered by private sector providers.

  • That the non-ERISA safe harbor under the proposed rule be available to any payroll deduction IRA program without regard to whether it is mandated by a state law (or offered under a state established IRA Program).

Unfortunately, those concerns were not addressed in the final regulation – creating an unlevel playing field for the private sector compared with the latitude provided the state-run alternatives by this final regulation.