Ed. Note: This article first appeared in Bloomberg
It’s unusual to see Republicans trying to impose regulations on state governments in order to protect workers. But that is what they’re doing, and they have a point.
The dispute concerns private-sector workers whose employers don’t sponsor retirement-savings plans such as 401(k)s.
Several state governments want to run programs for those employees, whose employers would have to automatically enroll them unless the worker opts out.
Almost all retirement plans for private-sector workers are regulated by a 1974 federal law: the Employee Retirement Income Security Act.
The law sets accounting standards on such plans, imposes fiduciary obligations on their administrators, and in other ways seeks to prevent abuse.
Pension plans for state government workers, on the other hand, are exempt from the law, known as ERISA, because of concerns about federalism.
The state governments that want to establish these new retirement accounts for private-sector workers want them to be exempt from the law, too.
To understand the partisan alignments on this question, it’s worth noting that the states in question are very liberal ones, such as California, Connecticut, Illinois and Oregon.
The Obama administration granted their wish. The Republican House voted to overturn that decision, though, and the matter is now before the Senate.
Enough Senate Republicans might be receptive to arguments for state-government autonomy to allow the liberal states to escape regulation.
Opponents of state IRAs, such as the Chamber of Commerce, make several arguments against them. One is that they could reduce employers’ participation in 401(k)s.
A recent survey of small businesses found that 13 percent said they would end their plans and enroll their employees in state IRAs, if they were instituted.
That number could grow as employers become more aware of the state-run programs, and as lawsuits make them less eager to administer their own plans.
For their workers, it would be a shift to retirement plans with lower contribution caps, no matching contributions and fewer legal protections.
The opponents also note that a lot of states, including the states that want to start these plans, have not managed their own employees’ pensions well. This argument isn’t entirely fair.
A perennial problem with government pensions is underfunding: Politicians promise generous benefits in the future, but will not put money in their plans here and now, and assume high returns to make up the difference.
State IRAs don’t pose this risk. They’re defined-contribution plans, which means the money gets set aside with each paycheck, and there is no promise of specific benefit levels in the future.
To say the risks are lower, however, is not to say there are none.
Would states favor particular investments for political reasons? Would management of investments be handed to politically favored contractors?
There are also alternative ways of expanding access to retirement-savings vehicles for the millions of private-sector workers who don’t have access to plans via their employer.
One, endorsed by the Chamber of Commerce, would be to change federal law to enable multiple employers to band together to offer their employees 401(k)s. Those plans would come with ERISA protections.
So maybe states shouldn’t start running IRAs for private-sector workers.
But that leaves the question: If the states decide they want to take on this responsibility, why should the federal government regulate them?
One answer is provided by Tom Christina, a specialist in employee benefits at Ogletree Deakins, a law firm that represents employers:
If these plans turn out not to have acceptable rates of return, then I think you will see the constituents of those plans in the various states clamoring for some kind of relief and one of the things that all of these plan designs have in common is that the states disclaim any responsibility for the rate of return. So the clamoring will be in the general direction of Washington.
State-government mismanagement, especially of pensions, has already created a danger that federal bailouts of states will someday be required.
It is a thorny problem without a good solution. Under the circumstances, letting states manage more retirement money at their discretion seems imprudent.
Congress should clarify that states can offer these IRAs, but that their plans will come under ERISA rules. Devolution is often a good idea, but this time Congress should say no.
Posted by: The Trust Advisor