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Obama Tells DOL to Clear a Path for State-Based Plans

President Obama on July 13 called on the Department of Labor (DOL) to “provide a clear path forward for the states to create retirement savings programs.” He made his remarks at the 2015 White House Conference on Aging.

Obama directed Secretary of Labor Thomas Perez to publish a proposed rule by the end of the year clarifying how states can move forward, including with respect to requirements to automatically enroll employees and for employers to offer coverage.

The move is likely to speed adoption of the state-based retirement initiatives underway in more than half the states, most of which have an explicit acknowledgement of the intent to avoid running afoul of ERISA’s preemption. Once approved into law, these programs would likely enjoy a competitive advantage over ERISA programs, due to their lower administrative costs, and lack of fiduciary requirements imposed on employers.

However, the lack of employer match, fiduciary oversight, low default contribution rates and conservative investment menus might leave workers covered by those plans at a financial disadvantage vis-à-vis ERISA qualified plans.

In May, more than a quarter of the U.S. Senate — including the ranking members of the Senate HELP and Finance Committees — signed a letter asking the Obama administration to act quickly to remove “any potential uncertainty” regarding the legality of various state-based retirement programs. (All but one of the signatories, independent Sen. Bernie Sanders of Vermont, were Democrats.)

Obama described the new directive as one designed to make it easier to save for retirement. “In today’s economy, saving for retirement has gotten harder,” Obama said, adding that “a Social Security check oftentimes is not enough.”

Noting that many American workers don’t have access to a retirement plan at work, he cited the administration’s previous budget proposals that called for creation of a national automatic IRA program for workers without access to workplace retirement plans. “Congress has repeatedly failed to act” on those proposals, he said, going on to note that “the good news is that states are stepping up” and “we want to do everything we can to support these efforts.” The president’s FY 2016 budget proposal set aside $6.5 million in funding for the Department of Labor, along with waiver authority, to support state efforts to implement state-based automatic enrollment IRAs or 401(k)-type programs.

Obama outlined four steps by which retirement security can be enhanced:

  • keep Social Security strong and strengthen retirement security for the most vulnerable;

  • make sure Americans saving for retirement “get a fair deal,” especially by “cracking down on conflicts of interest” in the advice offered by advisors and curtailing hidden fees charged by brokers;

  • make it easier to save for retirement; and

  • clear a path for the states to create retirement savings programs.

As Labor Secretary Perez has done in the past, Obama took care to note that not all brokers engage in practices to which the administration objects and that many serve their clients well.