President Obama has spent the last eight years governing by executive order and administrative rule. President Trump—aided by a Republican Congress—will have the capacity to dismantle some of the worst of these actions. One Department of Labor ruling especially ripe for scrutiny exempts states from federal regulations on private pensions. It thus allows the states—already responsible for massive problems with government-worker pensions—to begin offering retirement plans to private-sector workers. It’s a disaster waiting to happen.
State and local governments have already racked up at least $1.5 trillion in debt in their public-worker pension funds through irresponsible funding practices, including promising benefits that were never funded and engaging in questionable accounting practices. This mess has developed free from federal regulation because state-worker pension plans are exempt from the strict standards of the Employee Retirement Income Security Act, which imposes stringent accounting standards on private pension plans and makes overseers of such plans liable for mismanaging them.
Incredibly, even as local governments continue to struggle with the public-pension crisis, governors and state legislators around the country have proposed letting states offer government-run pension plans for private-sector workers whose employers don’t provide retirement benefits. However, because they would be for private workers, these pension plans would have to adhere to ERISA standards. States could potentially be legally liable in court for mismanaging them. To get around this, states began petitioning the Obama administration for exemptions from federal law. In August, the Department of Labor created a rule giving states “safe harbor” from the legal risks they might face under ERISA. Under the rule, states can now create 401(K) plans for workers who want to set aside money from their paychecks for retirement—as long as employers aren’t required to contribute their own money to the plans. Several states have begun planning to create these retirement systems, but none have started operating yet.
The safe-harbor rule would make states the biggest players in private-sector pensions. That’s because even as the Obama administration was freeing states from ERISA standards, it was increasing mandates on firms that run private-sector pension plans through the so-called fiduciary rule, issued by the Department of Labor in August —making the plans more expensive and less accessible. The added costs imposed by the fiduciary rule may ultimately wind up discouraging smaller private firms from offering workers their own pension plans. When businesses opt out, the new state plans will be waiting to gobble up that business. California alone has estimated that it would collect some $6 billion in private-sector pension money in the first year of its own proposed state-run plan.
The Trump administration and Congress can do better. They can overturn the safe-harbor rule and explore ways to expand the pool of private workers with pensions, without handing this task to the states. Trump should simultaneously roll back or water down the fiduciary rule so as not to discourage smaller firms from offering their own retirement plans. The federal government can change its current IRA plans to make offering them easier for businesses. Among other things, Trump and Congress could change the basic structure of the so-called Simple IRA—designed for use by firms with fewer than 100 employees—by eliminating or reducing the minimum contributions that a firm must make in order to qualify to offer a plan.
Even if the states hadn’t created such a mess with their own employee-pension plans, giving them exemptions from federal law on pensions is a bad idea, because it ultimately will make governments the biggest operator of private retirement plans, too. That’s not a role for the states.
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