Ed. Note: This article first appeared in Bloomberg
Nancy Harvey has a goal. “I’d like to retire before dying,” she said.
Harvey, 55, has almost nothing saved for retirement. She is a child-care provider in Oakland, Calif., and there isn’t much left over at the end of the month.
“It’s not a lucrative field,” she said.
She was looking forward to a new way to save, courtesy of her home state’s government.
The California Secure Choice Retirement Savings Program would create state-sponsored individual retirement accounts.
Employers would be required to offer their own retirement plans or sign workers up for the voluntary IRAs.
Four other states—Illinois, Maryland, Oregon, and Connecticut—are launching similar programs, also designed to make it easier to save on the job through payroll deductions.
Now, lawmakers in Washington are threatening to end the states’ auto-IRA programs before they start, setting up another likely confrontation between the Trump administration and Democrat-run state governments such as California’s.
Republican lawmakers and financial industry lobbyists argue that the state auto-IRA programs put an extra burden on employers, could end up charging high fees, and improperly skirt strict regulations governing retirement plans.
The states and their defenders, which include AARP, the retiree group, say local governments are stepping into an area in which the private sector and federal government have clearly failed.
Two in three American workers are not contributing to a 401(k) or other workplace retirement account.
In addition to the five states getting ready to unveil auto-IRA programs, legislators in more than a dozen other states have been pushing similar plans.
Harvey hopes California’s plan will be “a lot easier” than other options, with less-confusing paperwork to fill out, money automatically taken out of her paycheck, and investment options vetted by the state.
“I’m not trying to get a mansion on a hill, but at least to be able to maintain myself, to live comfortably [and] retire in dignity,” she said.
Before Harvey can start saving in a California Secure Choice account, the program has to survive political opposition and legal challenges.
In the final days of President Barack Obama’s administration, the Department of Labor issued rules making it clear that states, and even large cities, had the authority to create such programs.
Last month the Republican-led House of Representatives voted, almost entirely along party lines, to rescind those rules.
If the Senate and President Donald Trump agree, the rules will be lifted, putting California’s and other states’ auto-IRA programs in legal limbo.
“These rules are yet another example of the previous administration’s preference for government solutions to every problem and its affinity for over-regulation and bureaucratic red tape,” Senator Orrin Hatch, the Utah Republican and chairman of the Senate Committee on Finance, said in a statement when he introduced two resolutions this month to rescind the Obama-era rules.
“These proposed regulations encourage more mandates on job creators and promote locking American workers in risky state-run plans,” Hatch said.
California says it’s ready to defy Congress.
“We’re pressing forward with the program,” said Marc Lifsher, a spokesman for the Treasurer’s Office, aiming to launch Secure Choice by early 2019. “If there’s litigation, we’ll litigate.”
Other states are speaking more softly, at least for now. If the Obama administration rules are rescinded, “we in Illinois will have to evaluate next steps,” said Greg Rivara, press secretary for the Illinois State Treasurer.
State of Oregon spokesman James Sinks said OregonSaves is “planning to move forward” to launch a pilot program in July of this year.
“But it will be moving forward under a new cloud of legal uncertainty [that] creates headaches we don’t want to have,” Sinks said.
At issue is the Employee Retirement Income Security Act, a highly complex law enacted in 1974 to regulate retirement plans.
The law, also known as Erisa, is usually interpreted as barring states from interfering in the retirement space.
While the creators of state auto-IRA plans say they are built to be compliant with Erisa and older regulations, the Obama administration eased some doubts by issuing the new regulations, bolstering the plans’ legal authority.
Without the federal government’s blessing, it’s harder to surmise how courts might rule on state auto-IRA programs.
The issue has never been squarely addressed by a judge, said Michael Kreps, an Erisa expert who’s a principal at the Groom Law Group in Washington, D.C.
“You can make arguments either way, and it’s going to be up to a court to decide,” he said.
Even if the states ultimately win, the controversy could discourage other states and cities from starting their own retirement programs.
Meanwhile, more than 100 million U.S. workers continue to go without a workplace retirement account.
Posted by: The Trust Advisor