When It Comes to Retirement Plans, Phyllis Borzi Lays Down the Law

The assistant secretary for the U.S. Employee Benefits Security Administration chats about the implementation of state retirement plans and the fiduciary standard.


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.

Obama’s 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 DoL’s 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 ERISA’s role in expanding savings plan participation?

Borzi: Over the past few years, we’ve 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 Labor’s role in sanctioning a given retirement plan?

We don’t 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]. That’s 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 that’s what caused the president to want us to do something.

What does President Obama expect you to accomplish?

It’s 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 can’t 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 that’s the approach they want to take — and that’s perfectly fine.

You are going to help states that are looking to avoid being an ERISA plan?

We’re 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 president’s 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” approach.

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 wouldn’t have to worry so much about consumer protections, because they’re already built in. In other words, the state would simply be a service provider, offering to employers who don’t provide coverage an ERISA plan model that limits liability for the employers and limits liability for the states. We think that there’s 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 state plan?

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, we’re not going to use a regulation but what we call subregulatory guidance. The goal is to meet the president’s 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 we’re 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 wouldn’t 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 doesn’t permit us to do so. But we do think we have great confidence in a state-run program. What we’re planning to do here is devise an approach that would minimize the responsibility of employers. Because the state would be a service provider, it wouldn’t have the full range of ERISA requirements on the plan.

What is the most important issue as these plans are designed?

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. There’s 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 plans?

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 people’s paychecks eventually get into the individual’s IRA. Second, also if you’re putting in a program in which people are investing in IRAs, you need to think about how you’re 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 you’re 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.

The biggest problem we see in terms of conflicted advice is in the context of rollover 401(k) plans. In about 50 percent of the cases where the employee moves his 401(k) to an IRA, the IRA is a product offered by the company’s 401(k) recordkeeper. The recordkeeper’s call center is the main mechanism for facilitating these fund transfers.

Follow Frances Denmark on Twitter at @francesdenmark.

Get more on pensions.