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NAST 2014 Issues Conference
- 1. 1 NAST 2014 Issues Conference State Initiatives to Expand the Availability and Effectiveness of Private Sector Retirement Plans How Federal Laws Apply to Plan Design Options David E. Morse, K&L Gates LLP [email protected]
- 2. America’s Retirement Crisis • Most Americans rank having not enough money for retirement as one of their top concerns (Gallop, 2014). • A sizeable portion of workers report virtually having no savings or investments (EBRI, 2014). • Traditional pension plans are becoming rare in private sector. • Employees much more likely to save through company 401(k) plan than on their own via IRA or taxable account. • Approximately one-half of private sector workers are not covered by an employer plan. 2
- 3. Why Some Employers Don’t Provide Retirement Plans? • Expense • Management Time • Fear 3
- 4. States Can Take Action to Address • Pass enabling legislation. • State-appointed Board creates/runs turn-key retirement program. • Low-cost; low-risk; and user-friendly. • Allowing meaningful amounts to be saved for retirement. • While leaving room for the private sector to craft other solutions. 4
- 5. But…Challenge for States • Familiar with managing traditional defined benefit pension plans for public sector. • Already aware of fiduciary responsibilities, pooled and professionally managed funds and risk management. • State pension plans have been exempt from ERISA. • How would ERISA and other laws apply to state actions to address need in private sector? 5
- 6. Federal Law: ERISA • Covers all: – 401(k), traditional pensions, and other employer plans deferring payments until retirement; – Regulates plan operation and imposes strict duties on fiduciaries; but – Typical IRA is not an ERISA plan. • ERISA has lots of rules, but also provides workable standards, sound protections and a system for resolving benefit claims. 6
- 7. Fiduciary Details • Includes: – Plan sponsor; – Administrative Board and trustees; – Anyone with control over plan money; and – Anyone with power to hire/fire another fiduciary. • Duties: – Prudent expert, but can outsource to professionals; – Act in best interest of participants; – Perfection is not required, just reasonable decision-making.
- 8. ERISA Preemption • ERISA trumps state law that “relates to a benefit plan.” • Shifting legal standard. • Is state law that requires employers to offer a no-cost benefit preempted? 8
- 9. State Can Decide –ERISA or Exempt? • There are 3 plan options: – Individual Retirement Account (IRA); – 401(k)/defined contribution (DC); – Traditional pension; AKA defined benefit (DB); • ERISA exempt or ERISA coverage – states have enacted both models (California and Massachusetts). • Legal questions about ERISA remain. 9
- 10. IRA • Employee contributions via payroll withholding. • No employer contributions or “endorsement.” • Employee invests from menu of available funds selected by state board. • Pros – Simple – Portable • Cons – Low contributions ($5,500/year) – Leakage • Can state require auto-enrollment with opt out without triggering ERISA? 10
- 11. 401(k)/DC • Employee contributions via payroll withholding. • Employer matching and non-matching contributions allowed. • Employee invests from menu of available funds selected by board. • Pros – Flexible – Auto-enrollment allowed – Higher contributions ($18,000/year) – Portable – Less leakage than IRA • Cons – More complex than IRA • Single plan (MEP) or many separate plans? 11
- 12. Pension Plan/DB • Employees receive lifetime annuity. • Employers and employees may contribute. • Board, or its delegates, invests plan funds. • Pros – Ideal for providing retirement income – Less leakage • Cons – Employer has risk of underfunding (can reduce via design and hybrids) – More complex and costly to administer 12
- 13. State-Sponsored Plans Can • Avoid risk and cost to taxpayers. • Be self-supporting. • Offer options for fund investment. 13
- 14. Investments • IRAs and 401(k)s can have “default” investment of professionally managed, diversified low-cost fund. • Also offer “menu” of other professionally managed funds. • Pension plans invested by Board or delegate, would not have minimum return “bogey.” 14
- 15. Bottom Line • States can help workers to save for retirement. • No “correct solution.” – IRA, 401(k), and pension each have pros and cons • Don’t fear ERISA! – ERISA should not be made the bogeyman to stop states from taking action to address the retirement crisis. 15