Fiduciary Rule Debate Impacts State-Run Plans for Private Sector

A gang of Senate Democrats have submitted a bill to the Committee
on Health, Education, Labor, and Pensions, aiming to reverse
recent moves by majority Republicans
 to roll back the regulatory safe
harbors created by the Obama administration’s Department of Labor (DOL) to
exempt from the Employee Retirement Income Security Act (ERISA) state- and
city-run retirement plans created for private-sector workers.

The Democrats’ bill runs just seven pages and would directly amend Section
3 of the Employee Retirement Income Security Act of 1974, by adding at the end
the following: ‘‘(C)(i) The terms ‘employee pension benefit plan’ and ‘pension
plan’ do not include an individual retirement plan (as defined in section
7701(a)(37) of the Internal 12 Revenue Code of 1986) established and maintained
pursuant to a payroll deduction savings program of a State or qualified
political subdivision of a State.”

The bill also lays out some stipulations states and cities would have to follow to ensure their safe harbor exemption from ERISA, for example that participation must be mandatory and that basic standards of communication and transparency are met. 

Conventional political wisdom clearly has its limits in the
current environment, but common sense says the measure stands very little chance
of passing the full Senate, or of eventually getting a signature from the anti-regulatory
Trump administration. Interestingly, however, some experts have actually argued that the Democrats
and Republicans in Congress are
closer on this issue than they probably even realize

The argument is that
originally the states had put together this type of plan across the board using
individual retirement accounts (IRA) so as not to be subject to ERISA, which made sense before
the new fiduciary rule came into play during the Obama era. Readership will know that through the
fiduciary rule, which
is now in real jeopardy
 under Republican leadership, the DOL was pushing hard to have all IRA products
subjected to ERISA, whatever the context in which they were delivered. Against this backdrop, the states reiterated their need to
be exempt from ERISA, and the Obama-era DOL in turn issued an exemption for
these state- and city-based programs to be free from ERISA standards. 

In sum, because the
current administration is seeking to delay or outright kill the fiduciary rule,
this in large part should remove the states’ original concern about their exposure to
ERISA. In other words, the abolishment of the fiduciary rule
would make all this a moot point, since the IRA plans would not be subject to
ERISA anyway.

And so this is one of the many story lines in the retirement
planning marketplace that will hinge on whether or not the Trump administration
actually kills, rather
than simply delays
, the DOL fiduciary rule.