Let states be thrift labs, analysis says

We’ll pass that on, the U.S. Supreme Court said when asked to review a ruling on a challenge to the legality of CalSavers, California’s state-run pension plan for private sector employees whose employers do not offer them. Congress should take the hint, suggests a recent analysis, and let states experiment with similar plans undeterred.

The High Court thus indirectly expressed the view that CalSavers does not violate ERISA, and that this basic employee benefits law is not an impediment, writes Edward A. Zelinsky, Morris and Annie Trachman Professor of Law at the ‘Yeshiva University, in the research paper “How should Congress respond to Jarvis? Why Let States Experiment with Private Sector Retirement Savings Plans.”

But Zelinsky does not stop there. He notes that as the dust settles from the Supreme Court pass, the debris includes a suggestion that the federal government should step in and establish such a wholesale program. Zelinsky opposes this, however, and argues that instead of a federal mandate, states should be left to their own devices and allowed to experiment as they see fit.


Under CalSavers, the state maintains a Roth IRA for each employee covered by the program. The amounts withheld for each employee that employers send to CalSavers are allocated to the employee’s Roth IRA. Employers with five or more employees are required to participate. Managers selected by the CalSavers Board of Directors invest the Roth IRA funds.

Initially, 5% of an employee’s salary is withheld to be paid into the employee’s Roth IRA; the default percentage gradually increases to 8% of salary. Employees can opt out of the program; they can also choose that their contribution be higher than that set by law.

The Howard Jarvis Foundation, which was covered by CalSavers since it has more than five employees but does not have a workplace retirement program, challenged the program in Howard Jarvis Taxpayers Association v. California Secure Choice Retirement Savings Program, arguing that ERISA is ahead of CalSavers. The District Court for the Eastern District of California and then the United States Court of Appeals for the Ninth Circuit saw things differently and decided that ERISA did not prevent it.

Specifically, observes Zelinsky, the 9th Circuit said CalSavers was not a benefits plan under ERISA because the state of California established and maintains it, rather than employers.

Beyond the courts

There’s more to CalSavers than just providing retirement benefits to those in the Golden State whose employers don’t, Zelinsky says. He notes that this was a pioneer, the first program of its kind adopted by a state government and therefore served as a model for other state governments in providing coverage to these employees. in their jurisdictions.

Now that CalSavers has shown itself insensitive to this legal challenge, Zelinsky writes that there are two questions about the design of programs like California’s that are state-sponsored IRA programs:

1. What if a state grants discretion to an employer by giving them the right to voluntarily choose coverage in the state program?
2. What if a state allows employers to supplement employee contributions to their state-run IRAs by making employer contributions to their IRAs?

Arguments for a Federal IRA Mandate

Zelinsky says there are three arguments being made for the federal government to pick up the slack and provide such a program on a federal basis.

1. Replacing state programs with a federal mandate would extend ERISA protections to participating employees.
2. There are benefits to national uniformity.
3. Some states do not offer a state-sponsored private sector retirement program and likely will not; in these states, the choice is not between a federal mandate or a state-run program, but between a federal IRA program and nothing.

State Experimentation

In light of the Jarvis decision, Zelinsky says, states can experiment with what form a state-administered pension plan can take and the details of that plan.

Zelinsky writes that while most states that have created such programs use a model like California’s, it’s not the only one used. For example, Washington State has created a retirement marketplace where the state vets private plan providers and maintains a website where employers can compare them. And Vermont is pursuing an ERISA-eligible multi-employer 401(k) plan.

It’s possible, Zelinsky says, that no single model prevails — which he says would suggest that different states may find different models that meet their particular needs. To facilitate experimentation by states, says Zelinsky, the federal government should clarify two legal issues:

1. Employers covered by state-administered IRA programs should be permitted to contribute to their employees’ IRAs without such contributions converting the state IRA program to an ERISA-governed arrangement.
2. Employers who are not required by state law to participate in a state pension plan for private sector employers should be allowed to participate voluntarily without triggering ERISA coverage for the plan of State.

The essential

Zelinsky thinks that:

  • The federal government should not force private employers to adopt IRAs or other retirement programs; rather, he argues, states should be encouraged to experiment.
  • Employers covered by state-run programs should be allowed to contribute to their employees’ IRAs without turning the state program into an ERISA plan.
  • Employers who are not required by state law to participate in a state pension plan for private sector employers should be allowed to voluntarily elect to participate without triggering ERISA coverage for the plan. of State.
  • State experimentation with private sector retirement arrangements will generate not only useful information, but also various high-priority approaches to encouraging Americans of modest means to save for retirement.