Good intentions often go wrong, and so it is with a Labor Department rule issued last year, ostensibly to help private-sector workers start retirement accounts.
Some 36 percent of workers do not have access to any employer-based retirement savings plan. To reduce that figure, the Labor Department gave states (and some localities) the green light to set up and run retirement savings plans.
But states aren’t willing to take on the fiduciary responsibilities required of employers who offer retirement plans unless Washington exempts their plans for private-sector employees from federal rules and regulations. The Labor Department rule granted them that exemption — and that’s a problem. Giving state governments free rein can easily lead to less secure savings for retirees — and a huge liability for taxpayers.
An effort to reverse this rule through the Congressional Review Act process has already passed the House and awaits a vote in the Senate. Senate passage and a presidential signature could protect savers and taxpayers alike.
Proponents of the rule argue that states need “flexibility” to boost retirement savings. But if that’s all that’s needed, then Washington should issue a blanket exemption for all private-sector plans, giving them this magical flexibility as well.
In this instance, “state flexibility” is just a rhetorical device exploited to advance a government-knows-best agenda. The rule’s exemption presumes that governments don’t need any laws or directives to make sure they look out for savers’ best interests.
Sadly, we know that’s not true. State and local governments have a horrific record when it comes to managing retirement plans.
Nationwide, state and local governments have promised their own employees over $5 trillion more than they’ve set aside to pay them. The massive deficits result from excessive benefit promises, inadequate contributions, and playing politics with workers’ savings.
Government officials have routinely used retirement funds to invest in special-interest projects and reward political allies. Many also have politicized their investment strategies, shunning legitimate — but politically incorrect — industries and plowing huge sums into financially risky but ideologically aligned companies or ill-fated local projects.
Few workers would want to trust their retirement savings to fund managers known for dismal performances, but with state-based plans, they won’t have much of a choice. Labor’s rule requires participating states to impose an employer mandate: companies that don’t offer a retirement plan of their own must offer the state-run plan. (Most states have chosen to apply the mandates to employers with five or more workers.)
Businesses providing their own retirement plans incur administrative costs and legal liabilities. Many will drop their existing plans in lieu of a “free” and zero-liability state-based option. As a result, many workers will lose the plans they like (sound familiar?) and be forced to participate in the state-based plan if they want to maximize their tax-free savings.
Adding insult to injury, the rule prohibits employers from contributing to state-based plans. Those contributions average $2,640 per worker — a not insignificant hit to retirement savings.
It gets worse. Many states have required employers to automatically enroll their employees in the state-based plan. Since states are allowed to provide defined-benefit plans, workers can find themselves automatically enrolled into plans that deny them access to their money and over which they have no control. Moreover, they could lose all their contributions if they move out of state or stop contributing to the plan.
And how about taxpayers? The rule exempts governments from any liability for the plans they establish. Employers can’t be held liable for plans they are forced to offer. That leaves the taxpayer holding the bag whenever any promised benefits come up short.
Pension funds always pose a moral hazard to politicians. Inevitably they will be tempted to use state-based retirement plans to win favor with voters, promising things like guaranteed rates of return, cost-of-living increases in benefits, or low and no investment fees. But while politicians make promises, it’s the taxpayers who pay for them.
Risky state-run plans can do for private-sector retirement savings what ObamaCare has done to the private health insurance market. Congress should use the Congressional Review Act to undue the potential retirement disaster created by the Labor Department’s rule.
Instead of giving free rein to governments guilty of pension malpractice, Congress should revise existing regulations and make it easier for companies to pool together to offer retirement plans.
This piece originally appeared in The Hill on 3/13/17