On July 13 President Barack Obama directed the U.S.
Department of Labor (DoL) to issue a rule that would clarify a
path for states to create new private sector workplace savings
plans. Efforts to create these
savings vehicles are being organized in 25 states
throughout the country, by way of legislative action by elected
officials such as Washington State Senator Mark Mullet and
California State Senator and Senate President pro Tempore
Kevin de León with input from industry experts.
Obamas directive was a clear signal that the current
administration has accepted the fact that Congress is not
at least for the foreseeable future anyway going
to pass a nationally based, workplace retirement plan such as
the automatic IRA, which the president was supporting and that
has been repeatedly introduced in and rejected by Congress. It
is also a sign that the administration believes that 50 states
can plug the retirement plan coverage gap.
It falls to
Phyllis Borzi as assistant secretary for the DoLs
Employee Benefits Security Administration to lead the effort to
provide guidance to states that are working on plan designs.
Guidance is needed because these new plans must work in harmony
with existing federal pension law, the Employee Retirement
Income Security Act of 1974, commonly known as ERISA. The DoL
administers Title I of ERISA, which includes a set of rules
describing what a retirement plan is and what plans are covered
under the law.
Appointed to her current post by Obama in 2009, Borzi is a
former pension attorney who from 1979 to 1995 counseled the
labor-management relations subcommittee of the U.S. House of
Representatives Committee on Education and Labor. On
August 6 Senior Writer Frances Denmark spoke one on one with
Borzi at the
State Initiatives on Retirement Security Symposium held at
the Sheraton Seattle Hotel. There, state legislators and their
staff, asset managers and retirement security advocates
gathered to further the goal of providing a retirement plan for
the 50 million full-time employees without access to
company-sponsored or government plans. What follows is an
edited version of their conversation.
Institutional Investor: Have you received many
requests for clarity on ERISAs role in expanding savings
Borzi: Over the past few years, weve
met with many, many states on how they can expand coverage.
Part of what we do is help states evaluate sets of facts that
are brought to us as to whether or not a plan under ERISA has
been established. If a plan is established under ERISA, that
means that plan is subject to the various federal rules.
What is the Department of Labors role in
sanctioning a given retirement plan?
We dont have any legal authority to issue a binding
assessment of whether a particular state law or regulation will
or will not be preempted [by ERISA rules]. Thats because
preemption is a legal concept that ultimately is decided by the
court. There is no federal agency that can make that
determination in a binding fashion.
Is there a history of court decisions on whether a
plan triggers ERISA preemption?
We have no legal precedent to rely on this with any great
specificity; this really is an issue of first impression, which
means we all start from zero. The courts are ultimately going
to decide. I think thats what caused the president to
want us to do something.
What does President Obama expect you to
Its clear to us that what we can do to help states
that want to move forward is for us to give some guideposts and
guidelines of what we think the states can do in this area.
Because we cant be the ultimate decider of whether a
state plan is preempted or not, when people come to meet with
me about this issue, I describe it as a continuum of risk.
How do the paths states have been taking trigger
more or less risk?
One approach is to avoid ERISA at all costs. Now, the
important protections that it has brought to working men and
women and their families cannot be understated. But some states
have decided thats the approach they want to take
and thats perfectly fine.
You are going to help states that are looking to
avoid being an ERISA plan?
Were going to be working to give them some guidance
about the kinds of steps they can take in designing their
program to do that. That will take the form of a regulation.
Most states rely on our payroll deduction IRA guidance, which
initially also took the form of a regulation. Our lawyers tell
us that the best way to provide reliable guidance to the states
is to go back and amend those regulations and modernize them.
One part of our project to meet the presidents directive
is that we will be issuing by the end of the year a proposed
regulation that will address and give some good solid guidance
to the states that want to use that avoid ERISA
What are the dangers of avoiding ERISA?
Avoiding ERISA, as in an IRA marketplace, means that
important consumer protections are not required unless the
state builds those protections into its laws.
Do you think that states will be able design a new
private sector plan that is ERISA compliant?
A state could decide that instead of the avoid
ERISA approach, it could use the existing ERISA
structures in a way to advance coverage where the state would
be, in essence, a service provider offering a multiple-employer
plan that employers within the state would be part of. Then the
state wouldnt have to worry so much about consumer
protections, because theyre already built in. In other
words, the state would simply be a service provider, offering
to employers who dont provide coverage an ERISA plan
model that limits liability for the employers and limits
liability for the states. We think that theres no clear
guidance as to what will be preempted or not. A state could
offer an ERISA plan and not find that law preempted.
How will you provide guidance on an ERISA-compliant
If the state decides to go in the direction of using an
ERISA kind of structure, they can have one of many types of
plans: They could have a 401(k), a kind of account balance
plan, a traditional defined benefit plan or a hybrid plan. And
each and every one of them under current ERISA law permits
auto-enrollment and auto-escalation.
How do you envision this possibility?
For the second approach, were not going to use a
regulation but what we call subregulatory guidance. The goal is
to meet the presidents deadline by the end of the year by
offering a proposed regulation and guidance that would be out
at the very same time. States would have some clarity and
certainty moving forward.
How would a multiple-employer structure work for
these new state retirement plans?
The guidance that were planning to construct would be
building on some of our existing guidance under ERISA. What we
would be trying to do is to get to a place where the state
could offer, in essence, a multiple-employer plan that would be
treated under ERISA as if it were a single plan, which means
that the ERISA obligations wouldnt have to be complied
with by each employer but that, like any other service
provider, the state or whoever administered this plan would
take care of the ERISA obligations.
Under ERISA, the one set of obligations you can never get
rid of is the duty on the part of the employer to prudently
select and monitor the program. We could never write a rule
that would eliminate every aspect of fiduciary responsibility
for employers ERISA doesnt permit us to do so. But
we do think we have great confidence in a state-run program.
What were planning to do here is devise an approach that
would minimize the responsibility of employers. Because the
state would be a service provider, it wouldnt have the
full range of ERISA requirements on the plan.
What is the most important issue as these plans are
The thing we care about the most is consumer protection. We
believe that the most important consumer protection we could
have is to have the state establishing a plan and overseeing
it. Theres very little in the way of consumer protection
that we could build in if we opened it to anybody else being
able to oversee the plan. We have absolute confidence that the
state has the best interest of its citizens in mind. We feel
comfortable enough to adjust the rules a bit for states that
want to do this, because we know they want these plans to
succeed and have the interests of their citizens in mind.
Which are the most important consumer protections
that should be designed into the new state retirement
There are three important consumer protections. First, if
the state is thinking about an IRA a non-ERISA approach
you need to think about how to include a mechanism to
make sure that those contributions that are taken from
peoples paychecks eventually get into the
individuals IRA. Second, also if youre putting in a
program in which people are investing in IRAs, you need to
think about how youre going to ensure that they have all
the information they need about what these investments cost,
including fees related to
target-date funds, which can differ dramatically. You can
include fee-disclosure rules through the request for proposal
when youre implementing the program, or you can do it
through legislation. The third caveat has to do with our major
project now on conflicts of interest regarding retirement
advice. The DoL is trying to establish a baseline
fiduciary standard for people who hold themselves out to be
trusted retirement investment advisers, such that they have a
legal obligation to put their clients first.