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States Press Ahead With New Retirement Mandates

small, white piggy bank being cupped in a person's hands

I have something more than 1 million of my fellow Oregonians lack: a retirement plan through my employer.

That difference is set to disappear this July with the launch of OregonSaves. Yet the program’s future is uncertain due to Congress’ decision to roll back an Obama administration rule that encouraged state lawmakers to develop it in the first place.

In late 2015, I wrote an article for Palisades Hudson’s Sentinel newsletter examining the trend toward state-mandated employee retirement plans. As I explained then, state legislators across the country saw facilitating greater retirement savings as a prudent way to reduce the potential strain on the state’s social safety net. People who have sufficient retirement savings are less likely to end up on Medicaid or other social support programs, so state legislators viewed developing and administering such plans as a prudent preventative measure.

Led by California, over half the states in the country have either introduced or adopted legislation that would create some form of plan for private sector workers administered or overseen by the state. While the plans’ details vary, many of them were designed to take advantage of the Labor Department rule in question. That rule exempted state-backed IRAs with automatic worker enrollment from Employee Retirement Income Security Act (ERISA) regulations as long as participation remained voluntary and workers had a mechanism to opt out. In many states, the Labor Department rule reassured lawmakers that the state budget would not have to accommodate potentially costly ERISA compliance. After all, for many states, the entire point of pursuing such plans was to reduce strains on cash-strapped public finances.

However, this rule is now set to vanish. As part of the push to strike down Obama-era rules using the Congressional Review Act, in February the House of Representatives passed a resolution to scrap the Labor Department regulation exempting state-run plans from ERISA requirements. The Senate narrowly approved this resolution in early May, and President Trump is expected to sign it into law. He signed a similar resolution, in mid-April, which revoked a rule that exempted plans run by cities and municipalities from ERISA requirements in almost exactly the same way.

Many supporters of state-run retirement savings options feared that rolling back these rules would prevent the plans from moving forward. Yet as The Wall Street Journal reported, several states – including Oregon – have said they will proceed even without the Labor Department rule.

Under Congressional Review Act rules, agencies cannot enact regulations similar to the ones legislators struck down. This means that plans like Oregon’s, which will operate on an opt-out basis for employees, will be vulnerable to legal challenges and cannot expect regulatory shielding at the federal level. Officials in Oregon, as well as in Illinois and Maryland, have expressed confidence that the states will win in court even without such regulatory support. Some plans, such as those developed in Washington and New Jersey, will offer marketplaces where financial service companies can voluntarily offer low-cost plans to small businesses; these plans will not be affected, and are also likely to move forward.

Oregon state Treasurer Tobias Read told The Wall Street Journal that Oregon would continue to roll out its plan because “the need to address the oncoming retirement crisis is too great.”

This is not to say that the resolution, soon to be law, striking down the rule has had no effect. A state-run plan proposal recently failed in the Montana Legislature when opponents cited apparent congressional opposition to such programs. Some states will doubtless wait to see how potential court challenges play out before moving forward. And some are exploring other models entirely in an effort to work around the new regulatory hurdles.

According to Forbes, 55 million Americans currently don’t have a way to save for retirement through their workplaces. And while experts differ on the severity of “the retirement gap” – that is, the difference between how much American workers should be saving and how much they actually are – most agree that an opt-out system increases participation in savings programs. State-mandated retirement savings are not a cure-all, but they could make it easier to save for many people nationwide.

Mandated retirement savings plans certainly come with both costs and potential drawbacks. But many state lawmakers have found that these are outweighed by the potential benefits to their constituents and to their states’ finances. It is heartening to see that many of these programs will press ahead despite a congressional roadblock. With luck, they will stand up to any forthcoming legal scrutiny and help private sector workers in Oregon, and across the country, for decades to come.

Client Service Manager David Walters, who is based in our Portland, Oregon office, contributed several chapters to our firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55, including Chapter 6, “Transfer Taxes,” and Chapter 5, “Estate Planning.”

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