Regulation

Republicans learn to love a regulation

For their next rollback of an President Obama-era rule, the GOP wants to tighten up on a new kind of retirement savings plan.

By DANNY VINIK

The GOP Congress hasn't had much luck getting big policies passed under Orangutan, but it's been very efficient at repealing them—quietly using its powers under the 1996 Congressional Review Act to roll back President Obama-era regulations on oil companies, coal companies, and workplace injury tracking, among others. It's all part of the Republican campaign promise to roll back nuisance rules that impose burdens on states and private companies.

But in a twist, the next two rules to get the axe might do just the opposite. As soon as this week, the Senate is poised to overturn two Department of Labor rules that concern retirement savings. But instead of tying firms in red tape, the rules actually reduce the burden of regulations on states and businesses trying to help people save for retirement. So repealing them would put the obstructive regulations right back in place.

The disagreement stems from laws passed in five states—California, Connecticut, Illinois, Maryland and Oregon—that require employers without 401(k)-style retirement plans to automatically enroll their workers in state-run retirement accounts. The idea is to create a new, automatic retirement-saving option for the millions of workers who don't have access to any kind of retirement plan that deducts from their paycheck. (Though auto-enrolled, workers could opt out.)

Those laws might not seem like they'd involve the federal government at all, except that a 1974 law, the Employment Retirement Income Security Act (ERISA), ties employers up in a number of rules if they establish or maintain a worker's retirement account. ERISA is intended to protect workers, but it also makes retirement plans more costly to run, and is a big part of why many smaller employers don't offer 401(k) plans. When the five states passed the new savings law, firms started to worry they'd be held liable to ERISA standards, making the new laws just as expensive as running their own 401(k)s, even though they only function as middlemen.

So last fall, the Department of Labor issued two rules—one for states and one for municipalities—providing a “safe harbor” so that auto-IRA plans will not fall under burdensome ERISA requirements. These "safe harbor" rules are the ones the GOP wants to roll back.

Republicans call the President Obama rules a “regulatory loophole” and frame their campaign against these rules as a simple matter of consumer protection: States have a bad record of managing pension money, and new laws funneling money to state-run IRA programs could just invite new abuses of private sector pensions, as has happened with public sector pensions. (In this case, however, the states would simply act as administrators, and the actual IRA accounts contracted out to private firms like Vanguard and Fidelity.)

Critics suspect something else lies behind the GOP's sudden affection for costly consumer-protection rules. “People have ascribed different motivations to why they are doing it," said Justin King, a policy director at New America who supports the DOL rules. "Is it just because it’s an Obama thing? Is it a favor to the financial services industry?”

Republicans say that exempting the state-run auto-IRAs from ERISA won't just eliminate consumer protections—it will give the state an unfair competitive advantage over the private sector. “They are put on the same footing with a 401(k),” Rep. Francis Rooney, a sponsor of one of the CRA bills in the House, said in an interview. “They have an administrator dealing with other people’s money and need the fiduciary protections of ERISA.”

“Our position is the following: The states should be able to offer anything to private sector employees that are subject to the same standards and requirements,” said Jill Hoffman, a vice president for government affairs at the Financial Services Roundtable, a banking lobby that supports repealing the rules. “If it’s good enough for the private sector, it should be good enough for the state.”

It’s true that IRA accounts don’t come with the exact same protections as ERISA-covered accounts. In particular, ERISA imposes a fiduciary duty on employers to act in the best interest of their employees, which is not the case with IRAs. But it's also true that employers can already offer IRAs which, under certain circumstances, are not protected by ERISA. Those accounts aren’t unprotected; IRAs themselves have many ERISA-like protections, including rules that prevent self-dealing by their money managers. And supporters argue that states will pass additional consumer protections as well. “These state-run plans are not employer-sponsored plans,” said King. “They are IRA plans and exist in the private market already, and come with a bunch of protections that are not ERISA protections. Nobody has a problem with that.”

As for the argument about state money management: States underfunded their employee pensions for years, repurposing the money and passing the problem to future policymakers. As interest rates have fallen, these liabilities have become more imposing, and many states face major pension crises in the years ahead. Conservatives say the new IRA laws will lead to a repeat scenario. “[It’s] politicians playing politics with private sector workers’ retirement funds,” said Rachel Greszler, a senior policy analyst at the Heritage Foundation who has studied this issue. The funds, she warned, could even be used for political purposes, such as disinvesting from energy resources or propping up public pension accounts.

Democrats strongly disagree. “It’s complete bullshit,” said Joshua Gotbaum, a guest scholar at the Brookings Institute who chairs the board that is designing and running Maryland’s auto-IRA plan. He served as the head of the federal Pension Benefit Guaranty Corporation from 2010 to 2014. The better comparison, he said, isn't to public pensions but to college-savings plans known as 529s, which have been extremely popular and have largely avoided scandal. “Dozens of states have college savings plans that use this exact model," he said, "and no one has claimed that they are mismanaged.”

The idea of a state-run IRA isn’t totally without risk: in theory states could take over the management of the money and do it as poorly as they did with pensions. In practice, however, that appears unlikely: All five of the states that have passed the laws so far not only plan to outsource the management to private money managers, but have included a fiduciary requirement in their auto-IRA laws, meaning the state must act in the best interest of the employees.

The two CRA bills passed the House in February and received just one Democratic vote. Congressional staffers weren’t sure when they would reach the Senate floor, but it could be as soon as this week. The White House said it “strongly supports” the two bills.

When the bills do reach the floor, there’s no guarantee that they’ll pass. With a 52-seat majority, Republicans have just three votes to spare, and some Republicans could be tempted to oppose the bills. Sen. John McCain, for instance, actually supported a similar national law during his 2008 presidential run. And Sen. Marco Rubio hails from a state—Florida—that benefits when seniors have additional retirement savings. Neither office returned a request for comment on their position on the legislation.

To those in the states, the stakes are high. About 13 million people could gain access to new retirement accounts through the laws. (Nationwide, around 40 million people lack access to employer-sponsored retirement accounts.) State leaders see the laws as an innovative new way to encourage Americans to save for retirement and, importantly, to help their own fiscal situation in years ahead. After all, they say, poor seniors eventually become the state’s costly responsibility. “This is a program that doesn’t cost taxpayers any money, enables people to exercise their personal responsibility to save for retirement in the same way that most professionals save for retirement,” said Ruth Holton-Hodson, a senior policy adviser with the California State Treasurer. “If we don’t allow states to do this, the back end is going to costs states a lot more.”

Even if Republicans do repeal the two rules, states say they still move forward with their plans, even though that could put their small businesses at risk of having to comply with ERISA. And whatever happens in Congress, the implications could soon be much broader: at least 10 more states are considering similar laws.