Monday, April 11, 2016

The Real Threat - State Run Plans

Now that the OMB has released the final version of the DOL's Conflict of Interest rule, it is a perfect time to look at the other major event looming on the horizon in the 401(k) world.  Arguably, as far as threats to industry are concerned, this one is the bigger threat. This is the issue of State offered and State-Run retirement plans.

In Brief:
Right now approximately ½ of the states are considering some type of public sector retirement offering.  In general the types the states are considering fall into one of three categories:

     1.)    Mandatory Plan using a State-Run Automatic Contribution IRA
a.       Typically for Employers over a certain size not currently offering a 401(k), Pension, Simple IRA, SEP or other type of plan, minimum # of employees will vary from state to state
b.      This grants them safe harbor from being covered under ERISA per the DOL
c.       Generally what the “blue” states are considering

     2.)    Voluntary Marketplace Model – For companies with less than 100 employees
a.       IRA Type products, includes the OBAMA MIRA program
b.      Both Blue and Red states considering this

     3.)    Voluntary State Run plan – Akin to the state entering as a competitor to the private sector
a.       Mainly the “red” states that are thinking about these

DOL/FED Stance:  In December, 2015, the DOL provided an opinion letter regarding state offered plans.
1.)    That the states could be granted Safe Harbor from ERISA if the state program was 
     a.) Mandatory and 
     b.) Auto-IRA based

2.)   It allows for creation of State-Run OPEN MEPs – No states have yet to pursue this b/c this would NOT be exempt from ERISA.  This potentially gives an unfair advantage to a state offering since Open-MEPs are not yet available within the private sector

3.)    Now the DOL is done with the Fiduciary Rule – State Run plan rules/regs. is the main priority.  The DOL will be trying to get rules to OMB by July to get them through under Obama’s term

State by State: California, Maryland and Connecticut are closest to passing something in 2016
Website: houses all of the state-by-state details.  Here is a summary.

California - Mandatory State-run auto IRA program. – Looks likely for 2016, applies to companies with 5 employees or more not yet offering a retirement plan
Connecticut – Their study was completed in 2014, looks likely to pass in 2016.  There is a potential hold back to passage which is that in 2017 CT will be having major budget cutbacks, and this new bill will cost CT $10m to implement.  There may not be $$ for this at this time.
Some wrinkles here.  
1.)    There was some interest within the state to add certain coverage requirements, specifically that if you were a CT resident who was employed but wasn’t offered a workplace retirement plan and your employer has 5 or more employees, that the employer would be required to offer you the state option.  The wrinkle was that this would be for ALL employees, so for example, a CT based employee of a company out of Kentucky that didn’t offer a workplace retirement plan.  That KY employer would now be required to offer the CT based employee the state auto-IRA plan.  This would also go for CT employees that were excluded for some reason, such as part-time employees.  This was wrinkle was removed.
2.)    50% of Accumulated funds will be mandatorily converted into a lifetime annuity at retirement.  This is still in play.
Georgia – Just at the beginning.  Have commissioned a cost/benefit study
Hawaii – Just at the beginning.  Have commissioned a cost/benefit study
Illinois -  Illinois is the first state to actually enact a state run retirement program.  It is a state run auto-IRA required (mandatory) for employers of 25 or more employees not offering a workplace plan. 
-          The mandate won’t kick in until the program becomes operational.  They have not yet issued RFP’s for recordkeeping.
Indiana – This is a VOLUNTARY state-run program.  Because it is voluntary, it is subject to ERISA.  This is basically Indiana entering as a competitor in the space. 
Maryland- very close to becoming law.  Mandatory State Run Auto IRA for employers with 10 or more ees.  One twist here is a $300 filing fee being waived as an incentive for employers.  This has unanimous support in Maryland
New Jersey – NJ is adopting the Voluntary Marketplace model.  It is early stages, so details are fuzzy right now.  They aim to have it up and running by 2018.  This is b/c it is a partisan issue, Christie is out in 2018, and wants this in effect in case Democrats take over as governor.  Auto-IRA was originally presented, but got vetoed by Christie.
Oregon – One of most liberal states in U.S.  In 2015 passed their law.  It will be a mandatory Auto-IRA program, NO minimum employee threshold.  Board is working through schematics on it now.
Utah – Voluntary State-run Auto IRA program.  Thus, it is subject to ERISA>
Washington – Similar to NJ, opting for Voluntary Marketplace model.  They have just issued an RFP for a website and for product specs.

Again, more detail within the website link ( about what every state is doing.  I think this is important b/c, as an industry we potentially will have a new public option competitor in every state, but every  state may be different.  Interesting times. 

- Jason Grantz

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