State Initiatives on Retirement Security
ERISA is Not a Four-Letter Word
August 6, 2015
David E. Morse, Partner K&L Gates LLP
[email protected]
Karrie Johnson Diaz, Partner K&L Gates LLP
[email protected]
© Copyright 2015 by K&L Gates LLP. All rights reserved.
America’s Retirement Crisis
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A sizeable portion of workers report having virtually no
savings or investments (EBRI, 2014 RCS).
Traditional pension plans are becoming rare in the
private sector.
Employees are much more likely to save through a
company 401(k) plan than on their own via IRA or
taxable account.
Approximately one-half of private sector workers are
not covered by any plan.
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Why Some Employers Don’t Provide
Retirement Plans
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Expense
Management time
Fear
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States are Acting
Enabling legislation
Creates State Board to devise & run
turn-key retirement program which is...
Low-cost, low-risk, and user-friendly
and...
Allows meaningful amounts to be
saved for retirement...
While leaving room for the private
sector to craft other solutions.
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But…Challenges for States
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Familiar with managing traditional defined benefit
pension 401(k) & 457 plans for public sector.
Already aware of fiduciary responsibilities, pooled and
professionally managed funds, and risk management.
State plans are exempt from ERISA.
What you don’t know is scary.
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ERISA
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States may be surprised to learn that they are familiar
with many ERISA rules.
State retirement plans frequently employ ERISA-like
fiduciary concepts.
How would ERISA and other laws apply to state actions
to address needs in private sector?
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ERISA Basics
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Covers all:
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401(k), traditional pensions, and other employer plans
deferring payments until retirement;
Regulates plan operation and imposes strict duties on
fiduciaries; but
Typical IRA is not an ERISA plan.
ERISA has lots of rules, but also provides workable
standards, sound protections, and a system for
resolving benefit claims.
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Fiduciary Details
Includes:
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Plan sponsor;
Administrative Board and trustees;
Anyone with control over plan money; and
Anyone with power to hire/fire another fiduciary.
Duties:
 Prudent expert, but can outsource to professionals;
 Act in best interest of participants;
 Perfection is not required, just reasonable decisionmaking.
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ERISA Preemption
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ERISA trumps state law that “relates to a benefit plan.”
Shifting legal standard.
Is state law that requires employers to offer a no-cost
benefit preempted?
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State Can Decide – ERISA or Exempt?
 There are 3 plan options:
 Individual Retirement Account (IRA);
 401(k)/defined contribution (DC);
 Traditional pension; AKA defined benefit (DB);
 ERISA exempt or ERISA coverage – states have
enacted both models (California and Massachusetts).
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IRA
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Employee contributions via payroll withholding.
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No employer contributions or “endorsement.”
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Employee invests from menu of available funds selected by state
board.
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Pros
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Simple
Portable
No ERISA
Cons
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Low contributions ($5,500/year)
Leakage
Can state require auto-enrollment with opt-out without triggering
ERISA?
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401(k)/DC
 Employee contributions via payroll withholding.
 Employer matching and non-matching contributions allowed.
 Employee invests from menu of available funds selected by board.
 Pros
 Flexible
 Auto-enrollment allowed
 Higher contributions ($18,000/year)
 Portable
 Less leakage than IRA
 Cons
 More complex than IRA
 ERISA applies
 Single plan (MEP) or many separate plans?
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Pension Plan/DB
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Employees receive lifetime annuity.
Employers and employees may contribute.
Board, or its delegates, invests plan funds.
Pros
 Ideal for providing retirement income
 Less leakage
 Cons
 Employer has risk of underfunding (can reduce via design and hybrids)
 More complex and costly to administer
 ERISA applies
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Washington to the rescue?
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Until recently, U.S. DOL was somewhere between
unsure to unfriendly to SIRS.
Especially concerned with IRA plans “avoiding”
ERISA’s worker protections.
ERISA-covered MEPS seemed to be welcome.
Then, the President spoke….
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July 13, 2015 WH Conference on Aging
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By December 32, DOL will propose rule “clarifying how
states can move forward, including [on] requirements to
auto-enroll employees and for employers to offer
coverage.”
Secretary Perez on board.
Acknowledged “lack of clarity” has made it difficult for
states to develop solutions.
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What Will DOL Do?
 President suggests regs will say:
 Mandatory IRAs with auto-enrollment & escalation can
meet ERISA exemption; and
 Avoid preemption.
 Will regs be finalized by end of the Obama
administration?
 Will regs add ERISA-like fiduciary rules and
protections?
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Investments
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IRAs and 401(k)s can have “default” investment of
professionally managed, diversified low-cost fund.
Also offer “menu” of other professionally managed
funds.
Pension plans invested by Board or delegate, would
not have minimum return “bogey.”
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Federal Securities Laws
 Depending on the investment structure, investments
offered to participants must be registered as “security”
or exempt under ’33 Act and investment vehicle also
may have to register as an “investment company”
unless exempt under ’40 Act.
 Registration can be expensive/bothersome.
 Exemptions for qualified retirement plan (probably not
needed for IRA).
 Exemptions for state government “issuers.”
 Create special purpose bank insurer.
 Funding vehicles within plan (e.g., mutual funds) are
registered or exempt.
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State-Sponsored Plans Can
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Avoid risk and cost to taxpayers.
Be self-supporting.
Offer options for fund investment.
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Bottom Line
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States can help workers to save for retirement.
No “correct solution.”
 IRA, 401(k), and pension each have pros and cons
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Don’t fear ERISA!
 ERISA should not be made the bogeyman to stop states
from taking action to address the retirement crisis.
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