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Let States Be Savings Laboratories, Says Analysis

Practice Management

We’ll pass on that, the U.S. Supreme Court said when asked to review a ruling on a challenge to the legality of CalSavers, California’s state-run retirement plan for private-sector employees whose employers do not offer one. Congress should take the hint, suggests a recent analysis, and let the states experiment with similar plans undeterred. 

The High Court thus indirectly expressed the view that CalSavers does not violate ERISA, and that that bedrock benefits law is not an impediment, writes Edward A. Zelinsky, Morris and Annie Trachman Professor of Law at Yeshiva University, in the research paper “How Should Congress Respond to Jarvis? The Case for Letting States Experiment With Private Sector Retirement Savings Plans.” 

But Zelinsky does not stop there. He notes that as the dust of the Supreme Court’s hard pass settles, the debris includes a suggestion that the federal government should intervene and establish such a program writ large. Zelinsky takes exception to that, however, and argues that instead of a federal mandate, the states should be left to their own devices and be able to experiment as they see fit. 

CalSavers 

Under CalSavers, the state maintains a Roth IRA for each employee covered by the program. The amounts withheld for each employee and that employers send to CalSavers are allocated to the employee’s Roth IRA. Employers with five or more employees are required to participate. Managers selected by the CalSavers Board invest the funds of the Roth IRAs. 

Initially, 5% of an employee's salary is withheld to be put into the employee’s Roth IRA; the default percentage gradually increases to 8% of salary. Employees may opt out of the program; they also may choose to have their contribution be higher than that set by law. 

The Howard Jarvis Foundation, which was covered by CalSavers since it has more than five employees but has no workplace retirement program, challenged the program in Howard Jarvis Taxpayers Association v. California Secure Choice Retirement Savings Program, arguing that ERISA preempts CalSavers. The District Court for the Eastern District of California, and then the U.S. Court of Appeals for the Ninth Circuit, saw things differently and ruled that ERISA does not preempt it.

More specifically, Zelinsky observes, the 9th Circuit said that CalSavers was not an employee benefit plan under ERISA because the state of California established and maintains it, rather than employers. 

Beyond the Courts 

There is more to CalSavers than simply providing some retirement benefits for those in the Golden State whose employers do not, says Zelinsky. He notes that it was a trailblazer, the first such program a state government adopted—and therefore, has served as a model for other state governments in providing coverage to such employees in their jurisdictions. 

Now that CalSavers proved impervious to that legal challenge, Zelinsky writes that there are two questions about the design of programs like California’s that are state-sponsored IRA programs: 

1. What happens if a state grants an employer discretion by giving the employer the right to voluntarily elect coverage in the state’s program? 
2. What happens if a state authorizes employers to supplement employees’ contributions to their respective state-run IRAs by making employer contributions to their IRAs?

Arguments for a Federal IRA Mandate 

Zelinsky says that three arguments are being made for the federal government to take over and provide such a program on a federal basis.

1. Replacing state programs with a federal mandate would extend ERISA protections to participating employees.
2. There are advantages to national uniformity.
3. Some states do not offer a state-sponsored private sector retirement program and are not likely to do so; in such states, the choice is not between a federal mandate or a state-run program, but between a federal IRA program and nothing.

State Experimentation 

In light of the Jarvis ruling, says Zelinsky, states can experiment with the form a state-administered retirement plan can take and with the details of that plan. 

Zelinsky writes that while most states that have created such programs are using a model like California’s, that is not the only one in use. For instance, Washington State has created a retirement marketplace in which the state vets private plan providers and maintains a website at which employers can compare them. And Vermont is pursuing an ERISA-qualifying multiple employer 401(k) plan. 

It is possible, Zelinsky says, that no single model will prevail—which he says would suggest that different states may find different models that meet what their particular needs. To facilitate experimentation by the states, Zelinsky says, the federal government should clarify two legal issues:

1. Employers covered by state-administered IRA programs should be allowed to contribute to their employees’ IRAs without those contributions converting the state IRA program into an ERISA-governed arrangement. 
2. Employers not required by state law to participate in a state retirement plan for private-sector employers should be allowed to voluntarily participate without that triggering ERISA coverage for the state plan.

The Bottom Line

Zelinsky believes that: 

  • The federal government should not require private employers to adopt IRAs or other retirement programs; rather, he argues, the states should be encouraged to experiment. 
  • Employers covered by state-run programs should be allowed to contribute to their employees’ IRAs without that converting the state program into an ERISA plan. 
  • Employers not required by state law to participate in a state retirement plan for private-sector employers should be allowed to voluntarily choose to participate without that triggering ERISA coverage for the state plan. 
  • State experimentation with private-sector retirement arrangements will generate not only useful information, but also diverse approaches to the high priority of encouraging Americans of modest means to save for their retirement.