State-Facilitated Auto-IRA Retirement Savings Programs Are Not Subject to ERISA
By Ross Berg, Ph.D., and Angela Antonelli
Today, more than 57 million private sector workers in the United States lack access to an employer-sponsored retirement savings plan. If left unaddressed, this gap will ensure that entire generations of young workers —Millennials and now Gen Z — are unprepared for retirement. Even worse, it will contribute to exacerbating the financial racial and gender disparities that leave historically disadvantaged communities worse off.
To address this challenge, 14 states have passed or created new state-facilitated retirement programs designed to empower millions of workers to save for a secure future. These programs expand access to more than 20 million of the 57 million workers who lack the ability to save for retirement through their employers. And these programs are growing in number. This year alone, three more states — New York, Maine, and Virginia — passed legislation to create new programs and dozens of additional other states have signaled interest in doing so as well. As of May 31, 2021, state-facilitated retirement programs have helped workers save more than $266 million in retirement assets.
The vast majority of these state programs (10 of the 14 state programs) are automatic IRA programs or “auto-IRAs,” which automatically enroll workers in the saving program to contribute to an IRA if their employers don’t already offer a retirement plan. State-facilitated IRAs are carefully designed to be cost-effective and simple for employers — which only remit worker savings — and voluntary for workers, meaning that they can opt out or change their contribution at any time. What’s more, these state programs are overseen by public governance boards, ensuring that the responsibility of selecting and overseeing the retirement program falls to the state, not to employers themselves.
Despite this minimal level of involvement, the Howard Jarvis Taxpayers Association in California filed a suit against California’s state-facilitated retirement program, CalSavers, arguing that the program violates the federal rules regulating traditional employer-sponsored retirement plans.
Howard Jarvis Taxpayers Assn. v. The California Secure Choice Retirement Savings Program
The only lawsuit to contest the legality of a state-facilitated auto-IRA retirement programs—Howard Jarvis Taxpayers Association v. The California Secure Choice Retirement Savings Program alleged that CalSavers violated ERISA, the landmark 1974 legislation that regulates employer-sponsored healthcare and retirement plans such as pensions, 401(k)s and 403(b)s. In general, ERISA was enacted to protect participants in private sector employee benefit plans from improper administration, inadequate or misleading communications, and dishonest handling of plan benefits and assets.
Not all retirement plans are covered by ERISA. Individual retirement accounts (IRAs), for example, predate ERISA and — unlike 401(k) plans — are not sponsored by employers. ERISA only applies to retirement plans in which employers — not individuals — are responsible for overseeing, contributing to, or maintaining a retirement plan.
In state-facilitated retirement programs, however, employers only exercise ministerial duties. They simply set aside worker savings. They have no discretion, decision-making, or control over the governance of the program. The state governance board makes all the program design (e.g., investment options) and implementation decisions.
Even so, in Jarvis v. California, then, the question put to the court was whether these minimal duties constituted employer sponsorship or oversight, which would trigger the conditions for ERISA regulation. The court found that it did not for a few reasons.
- First, the court found that ERISA only applies to retirement plans when “an employer’s administrative duties … involve the application of more than a modicum of discretion.” CalSavers and other state-facilitated retirement programs only ask employers to remit employee wages and transfer these wages to a financial manager in a timely manner. This condition, therefore, did not apply.
- Second, since employers have no fiduciary oversight of the state retirement program, nor can they contribute to the plan with their own resources, the court ruled that CalSavers was not an ERISA-regulated retirement plan. Employer involvement in state programs is minimal and different than duties involved in creating a traditional 401(k).
This decision, however, was to be appealed.
Plaintiffs Appeal Denied by the 9th Circuit
On May 6, 2021, the United States Court of Appeals for the 9th Circuit upheld the decision issued by the federal district court.
The three judge panel unanimously found “that CalSavers is not an ERISA plan because it is established and maintained by the State, not employers; it does not require employers to operate their own ERISA plans; and it does not have an impermissible reference to or connection with ERISA. Nor does CalSavers interfere with ERISA’s core purposes.” Jarvis v. California had been dismissed once again.
The plaintiff then filed a request for the case to be heard en banc by the full 9th Circuit — and was denied, on June 15, 2021, with no judge requesting a reconsideration.
This isolated suit has not diminished interest from and enthusiasm of state leaders to consider adopting state-facilitated retirement programs. The 9th Circuit’s ruling should encourage them to do so. By keeping employer responsibilities to a bare minimum, future programs modeled after CalSavers can enjoy confidence that they are fully compliant with federal law. The District Court and the 9th Circuit decision in Jarvis v. California help to advance state-facilitated retirement savings programs.
Ross Berg, Ph.D. is a Senior Research Associate with the Center for Retirement Initiatives (CRI).
Angela M. Antonelli is a Research Professor and the Executive Director of the Georgetown University Center for Retirement Initiatives (CRI).
July 2021, 21-05
Antonelli, Angela and Morse, David (2021). State-Facilitated Retirement Savings Programs: A Policymaker’s Guide to ERISA and the Tax Code for IRAs and 401(k)s. Georgetown University Center for Retirement Initiatives.
Hallez, Emile (2021). “CalSavers upheld in US Court of Appeals case,” Investment News.