FACT SHEET: Middle Class Economics: Making It Easier to Save for Retirement
“We’ve got to make it easier for people to save for retirement . . . So I’ve called on the Department of Labor and Tom Perez to propose a set of rules by the end of the year to provide a clear path forward for states to create retirement savings programs. And if every state did this, tens of millions more Americans could save for retirement at work.”
– President Barack Obama, Remarks at the White House Conference on Aging, July 13, 2015
After a lifetime of hard work, Americans should be able to enjoy a secure and dignified retirement. While Social Security is and must remain a rock-solid benefit that all Americans can rely on, too many Americans reach retirement age without enough savings to supplement their Social Security checks – in part because many Americans don’t have a way to save for retirement at work.
At last year’s White House Conference on Aging, the President directed the Department of Labor (DOL) to issue rules providing states looking to create their own retirement savings plans with a path forward consistent with federal law. The Department issued proposed rules in November, and today finalized those rules. This marks a major step towards ensuring that every American can save for retirement at work and better prepare for their golden years.
Eight states – California, Connecticut, Illinois, Maryland, New Jersey, Oregon, Massachusetts, and Washington – have already passed legislation creating their own retirement savings arrangements. These states have taken action, even while Congress has failed to move forward on the President’s federal budget proposal to automatically enroll workers who don’t have access to a workplace savings plan in an IRA. Today’s rule addresses concerns raised by some about preemption or coverage by the Employee Retirement Income Security Act (ERISA), provides a path forward consistent with federal law, and will enable even more states to create their own programs. The Department is also announcing a proposed rule that would allow some larger cities to establish their own retirement savings programs.
- All Americans Should Be Able to Save for Retirement at Work: We know how to get people to save for retirement: provide them with access to a workplace savings plan and automatically enroll them in that plan. But about one third of all workers do not have access to a retirement savings plan through their employer. To help their residents save, eight states have passed laws creating their own retirement savings programs. DOL’s final rule clarifies the status of existing efforts, and will enable more states to create their own.
- DOL’s Final Rule Facilitates State Efforts to Create Retirement Savings Programs By Providing a Path Forward Consistent with Federal Pension Law: Specifically, the rule provides that a state retirement savings program is not an ERISA plan and hence unlikely to be preempted by ERISA if the program is established and administered by the state, provides for a limited employer role, and is voluntary for employees.
- Proposed Rules Would Enable Some Larger Cities to Create Retirement Savings Plans: Under the proposed rule, a city can create its own retirement savings program provided it has the authority under state law, its population is equal to or greater than the population of the least populous state, and the state does not have its own retirement savings program.
All Americans Should Be Able to Save for Retirement at Work
While Social Security is and must remain a rock-solid benefit that all Americans can rely on, too many Americans reach retirement age without enough savings to supplement their Social Security checks. In fact, fewer than one third of individuals aged 65 to 74 have any savings in a retirement account, and those that do have a median savings balance of just $49,000. For older Americans, inadequate retirement savings can mean sacrificing or skimping on food, housing, health care, transportation, and other necessities. Inadequate retirement savings places greater stress on state and federal social welfare programs as guaranteed sources of income and economic security for older Americans.
The good news is that we know how to get people to save for retirement: provide them with access to a workplace savings plan and automatically enroll them in that plan. But about one third of all workers do not have access to a workplace savings plan through their employers. Workers without access to a plan at work rarely save for retirement on their own: fewer than 10 percent of workers without access to a workplace plan contribute to a retirement savings account.
That’s why in every budget since taking office, the President has proposed to automatically enroll workers in an IRA if they don’t have access to a workplace plan. But in the absence of Congressional action, eight states have passed laws to create state-administered retirement savings programs for private-sector workers. Some of those state laws (sometimes referred to as “state auto-IRA” laws) require employers that do not offer workplace savings arrangements to automatically enroll their employees in payroll deduction IRAs administered by the states. Although other states are considering similar measures, uncertainty about potential preemption by ERISA has impeded broader adoption of such programs. Today’s final rule addresses these concerns, clarifying the status of existing efforts and enabling more states to create their own programs.
Today’s announcement builds on the Administration’s ongoing efforts to make it easier to save for retirement, and protect families who have done the hard work of saving for retirement. In 2014, the Department of Treasury launched myRA, a simple, safe, no-fee, and portable savings option aimed at individuals without access to a workplace savings plan. And this spring, the Department of Labor finalized rules requiring financial advisers to provide advice that is truly in their clients’ best interest. These rules will help eliminate conflicts of interest that cost savers $17 billion each year.
DOL’s Final Rule Facilitates State Efforts to Create Retirement Savings Programs
The final rule outlines the circumstances in which state retirement savings programs would not be treated as creating ERISA-covered pension plans, giving states legal comfort by reducing the risk that the state laws would be invalidated based on ERISA preemption.
In order to qualify under the final rule, a state program must be:
- Established and administered by the state. The program must be established pursuant to state law, and implemented and administered by the state. 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. The state may choose to contract with service providers to administer the program.
- Provide for a limited employer role. 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, 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. Employers cannot contribute employer funds to the IRAs. Importantly, employer participation in the program must be required by state law, not voluntary.
- Voluntary for employees. Because the program must be voluntary for employees even if it requires automatic enrollment, 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.
Proposed Rules Would Enable Some Larger Cities to Create Retirement Savings Plans
In response to public comments, the Department is also announcing 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. 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.