March 20, 2015

State Governments Try to Impose Their Plans on Local Governmental Employers

Should local government entities be forced to offer the existing state retirement plan to eligible employees, even if they have their own plan? This seems to be the issue of the day, as state governments consider legislation requiring all government subdivisions to offer the state plan as an option to employees.

That’s what happened recently in Washington state, where Senate Bill 5435 was proposed in the Washington State Senate with the objective of expanding participation in the Washington State Deferred Compensation Program, the state’s 457 plan (the DCP). The bill would require all counties, cities, and other political subdivisions that participate in any of the state retirement systems to offer the state’s DCP to eligible employees. Even if those entities offer their own retirement plans, they would also be required to offer the DCP. The argument is that the DCP is an efficient, low-cost retirement plan option that should be available to all state employees, regardless of whether or not they already have access to a retirement plan.

Washington State Senate Bill 5435 died in early March, but it is eligible for debate again in 2016. It’s not the first bill of its kind, and likely won’t be the last. Washington plan sponsors should be paying attention, but all governmental sponsors would do well to stay on alert.

While working toward making retirement savings plans more accessible to all state workers is a laudable goal, we believe this particular bill’s method is misguided. Many of the affected counties and municipalities already have existing retirement plans that are designed and tailored specifically for their participants. They have worked hard to negotiate the appropriate services and prices from their service providers. Adding the DCP could undermine those agreements with service providers, increasing plan costs and reducing sponsors’ ability to customize plans. The administrative and compliance costs of adding the DCP to payroll and other administrative systems would also be a significant burden.

Furthermore, state plans are able to bid on providing services for government entities within the state; if the state plan is the best choice for those employees, it can be provided without additional and unnecessary regulation.

Leveraging the scale of a large program such as DCP might provide a low-cost option for participants, but it could also eliminate the innovation and customization plan sponsors have worked so hard to provide for their employees. As plan sponsors know, one size does not fit all, and this attempt to fit everyone to a single standard makes it that much more difficult and costly to provide alternatives. These proposed laws take a degree of control and choice out of the hands of local governmental sponsors and move it up the chain to the state level.

If SB 5435 or similar legislation comes back next year, we are prepared to help educate and inform plan sponsors about the potential implications and consequences of such a law. We believe it will be important for the opinions and perspectives of local employers to be heard and represented, and will help to provide opportunities to make that possible.

To read the Senate Bill Report on SB 5435, visit http://lawfilesext.leg.wa.gov/biennium/2015-16/Pdf/Bill%20Reports/Senate/5435%20SBR%20WM%2015.pdf

To read the full bill, visit http://app.leg.wa.gov/documents/billdocs/2015-16/Pdf/Bills/Senate%20Bills/5435.pdf