U.S. Cities Free to Sponsor Private-Sector Retirement Plans

Employees in New York City without access to an employer-sponsored retirement plan just moved one step closer to getting one. Ditto those in Seattle and Philadelphia.

That’s because the U.S. Department of Labor’s Employee Benefits Security Administration yesterday published a so-called safe harborrulethat will permit large cities and other political subdivisions, such as counties, to create their own payroll deduction savings plans if their state does not offer one.

The rule follows a similar one, released in August, that allowed states to establish retirement plans that would avoid compliance with Erisa, the pension regulation passed in 1974. States including Connecticut, California, Illinois and Maryland have established statewide payroll deduction plans in recent years. Based on the new DOL rule, a city-based retirement plan would not be permitted in those states.

The ruling paves the way for cities that have already begun devising such plans to put them into action. One is New York City, where three out of five full-time workers have no workplace retirement plan. To address that problem, New York City Comptroller Scott Stringer established a retirement security study group, composed of pension experts and academics, 19 months ago to design a retirement program. The group — chaired by Scott Evans, deputy comptroller for asset management and CIO of New York City’s pension fund — announced the NYC Nest Egg Plan in October. This plan has three prongs that include the choice of either a 401(k) marketplace (the option selected by the states of New Jersey and Washington); a multiple employer plan in which a group of small, unrelated employers join together to start up a retirement plan; and a Roth IRA for private-sector employers who do not select either of the other two options.

Aside from the constraint that cities or counties can only sponsor plans where there is no established statewide option, the DOL also specified that to be eligible, political subdivision populations must be larger than those of the smallest state, which is Wyoming at fewer than 600,000 citizens. That leaves Seattle and Philadelphia — cities that have both expressed interest in creating their own retirement plans with payroll deduction and auto enrollment — free to proceed.

Seattle officials had been concerned that the city might not qualify because the State of Washington has enacted a retirement plan marketplace. But the DOL ruled that the marketplace is not a retirement plan, so Seattle is eligible to design its own plan.