State Law Project Report (Jan. 15, 2020): State Retirement Plan Savings, Fiduciary Rules, PBM Rules

State Law Project Report
January 15, 2020
In this issue:
The State Law Project is a multi-pronged initiative to ensure that state and local laws and regulations do not interfere with the federal preemption structure of ERISA which is vital for national employers with plan participants located across the United States.
Companies and firms interested in partnering with the Council to have a positive impact on state/local legislation and regulations are encouraged to contact Diann Howland, vice president, legislative affairs.

State Retirement Plan Savings

Council Provides Comments, Testifies on Colorado’s State-Sponsored Retirement Program for Private-Sector Workers

The American Benefits Council continues to advocate for all employers to receive complete exemption from state-based mandatory auto-enrollment payroll-deduction IRA programs (based on the listing of their employer identification number (EIN) on the plan’s Form 5500 filing)  and for the elimination of any reporting or exemption application requirements for all exempt employers. We recently testified in Colorado with recommendations on implementing a state IRA program without disruption to employer plans.

In 2019, the Colorado legislature created the Colorado Secure Savings Plan Board, charged with studying various approaches to creating a retirement savings plan for Colorado’s private-sector workers. The board is required to submit a report of its findings to the legislature in February 2020.

On December 11, Michael Hadley, partner at Davis & Harman LLP, presented to the board on behalf of the American Benefits Council. In his remarks, he emphasized that the Council’s goal is to ensure that any state’s IRA program does not adversely affect employers that already offer a retirement plan to their workers or undermine the successful private employment based system.

Hadley told the board that a state-based system should have the following characteristics:

  • Use an IRA model, to avoid the state improperly competing with the private market and maintain an incentive for an employer to adopt a full retirement plan.
  • Exempt all plan sponsors and all of their employees.
  • Minimize burdens on exempt employers, particularly with respect to reporting.
  • Leverage existing providers with expertise in savings and investing.
  • Maintain communication with stakeholders as the rules are implemented.
The board also received presentations from research firm Corona Insights and the Center for Retirement Research at Boston College.

During the question-and-answer period, Hadley reiterated that the Council supports voluntary options (such as Vermont’s program) and explained that state interference in plan design could trigger ERISA preemption. Colorado Treasurer Dave Young, the chair of the board, concluded by asserting that the program’s intention is to increase coverage without undermining the private system. 

The Council also followed up with written recommendations for the board. Submitted on January 6, these written comments outlined the appropriate features of a state- or city-run auto-IRA program, the importance of exempting all employers that offer a retirement plan and the potential impact of ongoing litigation in California (as described in the November 1, 2019, State Law Project Report).

A chart comparing approved and active state-based retirement plans is currently available on the Council website. For more information, contact Lynn Dudley, senior vice president, global retirement and compensation policy, or Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700.

State Fiduciary Rules

Council Urges Massachusetts Lawmakers to Fully Exempt ERISA Plans from Fiduciary Proposal

The Council recently provided written comments and formal testimony to Massachusetts focusing on employer implications as the state moves forward with regulations governing fiduciary duty on broker-dealers.

The Council has been the only organization to emphasize the importance of ERISA preemption in its communications with Massachusetts throughout the state’s regulatory process. In doing so we have sought to insulate employer plan sponsors from unintended consequences of the rule, including, for example, the application of an entirely new set of rules to call centers that serve millions of ERISA plan participants.

As illustrated in a detailed chart on the Council website, a number of states have proposed regulations that would establish standards for fiduciary duty following the invalidation of federal regulations that had been finalized under the Obama Administration. As with all the Council’s activities related to state and local law affecting employee benefits, our efforts are aimed at fully addressing the needs of all employers operating within the state or municipality.

After unveiling preliminary public regulations in June 2019 (on which the Council provided initial comments), the Massachusetts Securities Division issued a revised proposal in November imposing a fiduciary standard on broker-dealers. The proposal currently applies to ERISA plans but provides an exemption for any person acting as an ERISA fiduciary to a plan or its participants or beneficiaries. However, if a broker-dealer is providing recommendations to an ERISA plan or participant but not acting as an ERISA fiduciary (as is permitted under ERISA), the proposal imposes a fiduciary duty on that broker-dealer.

On January 6, the Council submitted a new set of comments on the revised rules, again urging state regulators to exclude ERISA-covered plans, participants and beneficiaries from the scope of any forthcoming state-level fiduciary duty rules. “Not only is this approach consistent with sound public policy, but it is also clear that federal law clearly preempts any state regulation designed to impose fiduciary duties on financial professionals with regard to their interactions with ERISA-covered plans, participants and beneficiaries,” the letter said.

The Massachusetts Securities Division also held a public hearing on January 7, at which Kent Mason, partner with Davis & Harman LLP, testified on the Council’s behalf. Mason reiterated that the state’s proposal “needs to be completely inapplicable to ERISA plans in order to avoid ERISA preemption concerns” and noted that the U.S. Supreme Court has interpreted ERISA’s savings clause very narrowly, and as such it would not save the proposal from ERISA preemption.

Mason was one of more than 20 witnesses providing testimony at the hearing, all of whom expressed significant concern with the proposal. As the only witness to highlight the importance of ERISA preemption, Mason argued that, if the trend of state-by-state regulation of employee benefit plan fiduciaries proceeds unabated, “Not only will the state rules be different from one another, there is no assurance that the rules will not directly conflict. For example, one state might require advice regarding an employee’s entire financial situation. Another state might preclude such advice from someone who does not hold certain licenses and the Department of Labor could find a problem with retirement advice that takes into account non-retirement needs. These sorts of problems could lead to less information and less availability of innovative programs.”

In light of these concerns, Mason urged the Division to:

  • Wait for the implementation of the Securities and Exchange Commission’s (SEC) activity in this area and then reevaluate whether any need remains for further state regulation. (In June 2018, the SEC approved its own Regulation Best Interest, known as “Reg BI,” governing fiduciary duty (see the June 11 Benefits Byte for more details.)
  • Make significant changes to the proposal, in part to make it align more closely with Reg BI.
Massachusetts Governor Charlie Baker (R) has urged Secretary of the Commonwealth William Gavin to defer action on the proposal, noting “The draft regulation does not appear to sufficiently account for differences in the industry, inadequately defines key terms, and how regulated entities can resolve potential conflicts of interest, and departs from federal regulations and regulations adopted in other states.”

For more information, contact Lynn Dudley, senior vice president, global retirement and compensation policy, or Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700.


PBM Regulation

Supreme Court to Consider Whether ERISA Preempts Regulation of PBMs

The U.S. Supreme Court has granted certiorari in the case of Rutledge v. Pharmaceutical Care Management Association, meaning the high court will review an Eighth Circuit Court of Appeals ruling that ERISA preempts state regulation of Pharmacy Benefit Managers (PBMs).

The case stems from an Arkansas statute – similar to laws enacted in some other states – regulating the minimum amount PBMs must pay to pharmacies for generic drugs, intended to address the trend in Arkansas of significantly fewer independent and rural-serving pharmacies. In a June 2018 decision, the Eighth Circuit ruled that the Arkansas law is pre-empted by ERISA.

In its petition to the Supreme Court, Arkansas argued that the Eighth Circuit’s decision conflicts with the Supreme Court’s prior rulings on ERISA preemption, including the precedent that ERISA does not pre-empt rate regulation. Arkansas asked the high court to review the case based on what it characterizes as a circuit split (between the First Circuit, on one side, and the Federal Circuit Court of Appeals and Eighth Circuit on the other) on the extent to which state law regulation of PBMs is preempted by ERISA.

After the petition was granted, PCMA issued a public statement, pointing out “Unique state laws governing the administration of pharmacy benefits are proliferating across the country, establishing vastly different standards. These inconsistent and often conflicting state policies eliminate flexibility for plan sponsors and create significant administrative inefficiencies. These inefficiencies divert funds from where they should be spent: providing access to the health care services on which employees of plans across the country rely.”

For more information, contact Katy Johnson, senior counsel, health policy, or Ilyse Schuman, senior vice president, health policy, at (202) 289-6700.