Department of Labor Clears Way for State-Run IRAs

By Sarah Brenner, IRA Analyst
Follow Us on Twitter:

Your state may soon be getting into the IRA business. The Department of Labor (DOL) removed a major hurdle recently, when it issued final rules for state-run IRA programs. The final rules give states a safe harbor from Employee Retirement Income Security Act (ERISA) for state-run IRAs if certain conditions are met.

Retirement Savings Shortfall

According to statistics released by the White House and the DOL, many Americans reach retirement age without enough savings. This is in part because many do not have a way to save for retirement at work. Approximately 39 million employees in the United States do not have access to a retirement savings plan through their employers. Even though such employees could set up and contribute to their own IRAs, most do not. In fact, according to the DOL, less than 10% of all workers contribute to a plan outside of work.

Limited Federal Response

To address these issues, the Obama administration established and expanded the myRA program. myRA accounts are a type of Roth IRA that is designed to be an easy and safe savings option with no fee, and is aimed at individuals without access to a workplace savings plan. However, the administration’s efforts to establish a program that would automatically enroll millions of workers who don’t have access to workplace savings plans in payroll deduction IRAs has never gotten off the ground in Congress.

States Take Action

With no action on the federal level, several states have taken on the task of establishing their own retirement savings arrangements for those workers without access to plans at work. Different states have tried different approaches. California, Connecticut, Illinois, Maryland, and Oregon have adopted laws providing for state-run IRAs. These plans require the establishment of payroll deduction IRAs for workers without access to workplace retirement plans.

One major road block for state-run IRAs has been worries about the scope of ERISA. There have been concerns that state-run IRA programs may be subject to ERISA, despite the express intent of the states to avoid that.

Safe Harbor from ERISA for State-Run IRAs

The final regulations create a safe harbor for states’ use to avoid the reach of ERISA for their state-run IRA plans. While the safe harbor is not an absolute guarantee that there will never be a lawsuit, it does significantly lessen the threat of litigation against states who get into the IRA business. To qualify for the safe harbor, the state-run IRA program must meet certain conditions.

Key among those conditions are the following:

  • The state must be responsible for investing the employee savings and for selecting the investment alternatives from which employees may choose.
  • The state is responsible for the security of worker’s payroll deductions and their savings.
  • Employers cannot contribute employer funds to the IRAs. Employers are not allowed to provide a match or make any other types of company contributions.
  • Employee participation in the program must be voluntary. If the program requires automatic enrollment, employees must be given the right to opt out.

City-Run IRA Programs

With the safe harbor from the long arm of ERISA now available, you are likely to see more states offering state-run IRAs in the future. The DOL is not stopping there. Coming soon may be city-run IRAs. In response to public comments, the DOL has announced a proposal that would potentially expand the new rules to cover IRA programs run by larger cities and counties.

Receive Ed Slott and Company Articles Straight to Your Inbox!
Enter your email address:

Delivered by FeedBurner


Content Citation Guidelines

Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.

Please be advised that prior to distributing re-branded content, you must send a proof to [email protected] for approval.

For white papers/other outflow pieces:

Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC – depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC – depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.

For charts:

Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.

For Slott Report articles:

Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

Please contact Matt Smith at [email protected] or (516) 536-8282 with any questions.