Why Did Trump Eliminate New Pension Law for Employees?

Suppose you work for a small employer, say, a local restaurant or a heating and air conditioning company—and your company offers no 401(k) pension plan.

A 401(k) plan refers to a defined contribution plan. The employer is not obligated to pay for it, though it may. The employee is able to fund the account through payroll deductions and to deduct contributions from income for tax returns.

The Obama administration came up with a small but important solution. In a Department of Labor rule, it gave authority to states to create individual retirement account programs for nongovernment employees who lack access to retirement plans through their employers. 

Under ERISA, the federal law for private sector pensions, there is no role that a state can play in private sector pensions. The law doesn’t allow it, nor does it prohibit it.

Trump’s action rolls back an August 2016 DOL rule that provides a safe harbor from the Employee Retirement Income Security Act for states that create individual retirement account programs for nongovernment employees who lack access to retirement plans through their employers.

Last week, President Trump signed a law that was passed under House Joint Resolution 66. In early May, the bill passed the Senate on a 50-49 vote after having won approval in the House of Representatives in February, largely along party lines.

This effectively deauthorizes eight states had already created such programs. As reported by Reuters, “Most of those states, including California and Illinois, had passed laws requiring employers that don't offer a workplace savings option to automatically enroll employees in state-administered IRAs through payroll deductions, while some other states had created a marketplace of savings options for workers without employer-sponsored plans.”

Key to note, states were not supposed to fund the plans, nor did states require employers to fund the plan. The point of the law was to create an enrollment mechanism for these private sector workers to have access to a 401(k) plan when their employer chose not to provide that option.

With Social Security heading toward insolvency, what’s the point in disallowing workers from having access to a 401(k) plan?

The AARP strongly favored the Obama rule. After the passage of this repealing law, AARP expressed disappointment that older people will not be able to invest for their retirement.  

Credit: Sack, Star Tribune