&l;p&g;What if the government could offer services that directly compete with the private sector, subsidize the cost of the services with tax payer dollars, and mandate public participation?&a;nbsp; And all those pesky regulations that take time and cost money?&a;nbsp; What if the government could just adopt a resolution exempting itself?
This is already a current &a;ndash; and expanding practice.&a;nbsp; Consider the Post Office:&a;nbsp; it is operationally unprofitable, runs at an&l;span&g;&a;nbsp;&l;/span&g;&l;a href=&q;https://www.trucks.com/2017/03/06/usps-reforms-threat-fedex-ups/&q; target=&q;_blank&q;&g;approximately $6 billion deficit&l;/a&g;&l;span&g;&a;nbsp;&l;/span&g;and has a grossly underfunded pension.&a;nbsp; Yet it prices its services competitive to Federal Express and DHL.&a;nbsp; Efforts to reduce costs and operate more efficiently &a;ndash; such as by eliminating Saturday delivery &a;ndash; have been rebuffed and are all but dead.&a;nbsp; If the Post Office were anything other than a Constitutional service, it would have closed its doors long ago.
But that&a;rsquo;s not all &a;ndash; the government is now entering the retirement plan industry &a;ndash; but not on just any terms – only if it can exempt itself from regulatory oversight.
&l;img class=&q;dam-image shutterstock size-large wp-image-1060172294&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/1060172294/960×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; Shutterstock
Indeed, within the past few years, several states have adopted legislation empowering them to create state-run IRAs &a;ndash; so called &a;ldquo;Auto IRAs&a;rdquo; – for residents that do not have access to 401(k) accounts.&a;nbsp; New York State unveiled its plan earlier this week.&a;nbsp; Under the proposed rules of these states, employees who do not have access to a retirement plan would be required to participate in a fund managed by the state or city.&a;nbsp; That fund would be invested on behalf of these employees for retirement, and would supplement federal benefits, such as Social Security.
This set up sounds simple enough but has created a significant and striking problem:&a;nbsp; employers and the government both raised concerns they might be responsible for the management &a;ndash; or mismanagement &a;ndash; of the funds under relevant law — the Employment Retirement Income Security Act, or ERISA.&a;nbsp; ERISA is a complex series of rules establishing minimum standards for retirement plan management, including an obligation that plan managers act as fiduciaries and put all participant interests ahead of their own.&a;nbsp; In the case of state run plans, ERISA would apply, and the government and employers might be subject to ERISA liability &a;ndash; something both parties sought to avoid.&a;nbsp; The fix for this was as stunning as it was easy:&a;nbsp; the Department of Labor simply exempted all state run Auto-IRAs from the application of ERISA.
&l;img class=&q;dam-image shutterstock size-large wp-image-495872755&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/495872755/960×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; Shutterstock
The DOL rule, called &q;Savings Arrangements Established by Qualified State Political Subdivisions for Non-Governmental Employees,&q; offered a safe harbor for government entities that would exempt their programs from ERISA.&a;nbsp;&a;nbsp; Adoption of this safe harbor put states in a rather plum market position:&a;nbsp; they could mandate employer participation, charge market rate fees, and exempt themselves from applicable regulation.&a;nbsp; This last exemption is especially rich given the DOL&a;rsquo;s nearly contemporaneous adoption of a mandatory fiduciary standard for all private industry brokers advising ERISA plans.&a;nbsp; But that&a;rsquo;s not even the best part:&a;nbsp; certain select regulations will continue to apply &a;ndash; &l;strong&g;&l;em&g;but only to participants- &l;/em&g;&l;/strong&g;such as contribution limits and restrictions on plan entry.&a;nbsp; The government is explicitly &a;ndash; and carefully &a;ndash; carved out. &a;nbsp;Problem solved?&a;nbsp; Not so fast&a;hellip;
Enter the Trump Administration.&a;nbsp; In May 2017, President Trump signed H.J. Res. 66, a joint Congressional resolution killing that safe harbor.&a;nbsp; Nevertheless, some states &a;ndash; such as California &a;ndash; are forging ahead after obtaining an &l;a href=&q;http://www.treasurer.ca.gov/scib/k-l-gates-opinion.pdf&q; target=&q;_blank&q;&g;opinion from a law firm&l;/a&g; stating that the program would not be subject to federal law. &a;nbsp;This seems quite unfair to the private sector: private retirement plan providers are obliged to choose investments, monitor performance and &a;ndash; as they rightly should &a;ndash; abide by relevant fiduciary principles.
&l;img class=&q;dam-image ap size-large wp-image-75d954b226d949cfa0110ad510bee221&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/75d954b226d949cfa0110ad510bee221/960×0.jpg?fit=scale&q; data-height=&q;718&q; data-width=&q;960&q;&g; Senate President Pro tem Kevin de Leon, D-Los Angeles, accompanied by state Treasurer John Chiang, right, says he will move forward with his plan to automatically enroll private-sector workers in state run retirement plans, during a news conference, Thursday, May 18, 2017, in Sacramento, Calif. The Secure Choice Plan, signed into law by Go. Jerry Brown last November, could be challenged in court after Congress revoked a legal safe-haven created by former President Barack Obama. (AP Photo/Rich Pedroncelli)
Although worrisome, government competition against the private sector looks to be increasing:&a;nbsp; in fact, banks are next on the government&a;rsquo;s horizon:&a;nbsp; New Jersey has announced plans to create a &l;a href=&q;https://www.wsj.com/articles/politicians-want-to-start-a-bank-what-could-go-wrong-1522443732&q; target=&q;_blank&q;&g;public bank&l;/a&g; which would, among other things, be able to transact in real estate obtained by eminent domain, be exempt from the payment of taxes, and presumably be the first to be bailed out in the event of default.&a;nbsp; No word yet on whether such a bank should be subject to Dodd-Frank oversight.&a;nbsp; What could possibly go wrong?