Municipalities to Offer Private Sector Retirement Plans

After allowing state governments to establish retirement plans for private sector employees, the U.S. Labor Department has cleared the way for municipalities to do the same. But the criteria established by the Labor Department will limit the cities that can offer the plans.

In August, the Labor Department passed the regulation, after which the State of California began establishment of the California Secure Choice Retirement Savings Program for all private sector workers at companies with five or more employees. California estimates that approximately 7 million workers will be enrolled in the program. Now, four states – Oregon, Illinois, Maryland and Connecticut – are setting up state-run options, and will require employers who don’t offer retirement plans to give workers the option to enroll in these state auto-IRAs, with the option to opt-out.

Last week, the Labor Department amended the August rule to allow for large municipalities starting January 19 to establish retirement plans for private-sector workers. However, the municipalities must be authorized under state law to establish the program. In addition, the program cannot overlap with an existing statewide plan (which would exclude Los Angeles, San Francisco and other California municipalities).

Additionally, the municipality must have a population greater than that of the least-populous state. Since the ruling does not include Washington, DC and overseas territories, the state with the smallest population is Wyoming, with approximately 586,000 residents. The Labor Department has so far received inquiries from representatives in Seattle, Philadelphia and New York City who are interested in implementing the program. However, it estimates that of the approximately 90,000 local governments nationwide, only about 88 would be eligible based on the criteria.

Alan Butkovitz, city controller for Philadelphia, wrote a letter in September to the Labor Department voicing his support for the amendment. He stated that 54% of workers in the city (about 334,000 people) do not have access to a retirement plan through the workplace. “The proposed rule would assist employers and employees by allowing cities to create plans that would automatically enroll them into an IRA plan unless they opt out,” he wrote. “By including local governments, local policymakers will gain a tool that may be able to help them to address the serious issue of retirement security that is facing our communities.”

The future of the state- and municipality-run auto-IRA plans is uncertain in light of the change in presidential administrations next month. President-elect Donald Trump takes office on January 20, the day after the amendment is scheduled to go into effect.