Personal Finance

Feds ease rules on state-run retirement accounts

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The White House announced a rule Thursday that will help states initiate retirement savings programs for private-sector workers who don't have a 401(k) at work.

The Department of Labor regulation creates a road map for states to set up retirement accounts that participants would fund with payroll deductions.

About 55 million American workers currently don't have access to a workplace retirement plan.

Right now, eight states have enacted or are weighing legislation to establish retirement accounts for employees who otherwise can't save for retirement.

California is the latest state to take steps toward implementing a program. The Golden State's assembly approved the Secure Retirement Saving Program on August 25, bringing it a step closer to passage.

Other states working on similar plans include Connecticut, Illinois, Maryland, New Jersey, Oregon, Massachusetts and Washington.

The Labor Department also announced a proposal to expand the rule to cover a limited number of larger cities and counties.

Federal law was a deterrent

Federal law, specifically the Employee Retirement Income Security Act of 1974, has deterred many states from proceeding with similar payroll deduction IRA programs. That's because it was unclear how these state plans would have been subject to ERISA, which is the regulatory framework that governs traditional 401(k) plans.

"When something is subject to ERISA, it becomes expensive to maintain," said Marcia Wagner, managing director of The Wagner Law Group in Boston.

The new rule prevents ERISA from preempting state legislation. States have their own rules for retirement plans and fiduciary standards of care, which would apply to these IRAs, Wagner said.

Not everyone was thrilled with the new regulation.

"We are disappointed with the Department of Labor's final rule, which exempts state-run retirement programs for private sector employees from vital consumer protections provided by ERISA," said Investment Company Institute CEO Paul Schott Stevens in a statement.

"Several states have already moved forward with state-run 'Secure Choice' style plans — programs that are fraught with risks for taxpayers and savers," Stevens said in his statement.

Labor Department spokesman Jason Surbey disagreed, saying that the protections for IRAs are no different for states than they are for the private sector. The regulation requires that states assume responsibility for the safety of employee contributions, including protection from mismanagement and fraud.

"In this case, the moneys involved belong to the workers, and are subject to protection under the Internal Revenue Code, including the requirement that the assets be held in trust and the prohibitions on committing prohibited transactions," Surbey wrote in an email.

Update: This story has been updated with comment from the Department of Labor.