April 27, 2021

By Jay Chaudhuri

On February 8, less than three weeks after President Biden’s inauguration, the U.S. Department of Labor (DOL) withdrew its support for a lawsuit challenging the CalSavers Retirement Savings Program (CalSavers). “After the change in administration, the Acting Secretary of Labor has reconsidered the matter and hereby notifies the court that he no longer wishes to participate as amicus in this case and that he does not support either side,” the DOL said in its court filing. The DOL’s decision to end support is significant because it may potentially offer insight into how the Biden Administration will work with state-run automatic individual retirement accounts, known as auto-IRAs, which provide retirement savings programs to privates sector employees whose employers do not offer them.

As background, in 2011, the University of California, Berkeley’s Center for Labor Research and Education released a seminal study that found “middle class families in California are at significant risk of not having enough retirement income to meet even basic expenses, as nearly 50 percent of middle-income California workers will retire at or near poverty.” The study also said that Californians’ retirement security would worsen as future workers retire without employer-sponsored benefits. In 2012, California passed legislation to address this concern. Specifically, the legislature enacted the country’s first state-sponsored defined contribution program for private sector employees who do not have access to a retirement plan. The program is estimated to cover 7.5 million Californians. In 2018, CalSavers launched a pilot program; it will expand to all eligible employers by 2022.

In 2018, the Howard Jarvis Taxpayers Association (HJTA), a nonprofit lobbying and policy organization, filed a lawsuit seeking to block the CalSavers program. HJTA contended the federal Employment Retirement Income Security Act (ERISA) preempted the CalSavers program and no taxpayer money should be spent on the program. In March 2019, a federal district court dismissed the case, but allowed HJTA to amend its complaint. The court held that ERISA does not preempt the California statute establishing the CalSavers program because the key test for ERISA preemption is whether the CalSavers program “governs … a central matter of plan administration or interferes with nationally uniform plan administration.” The court concluded that because the CalSavers program neither “governs” nor “interferes with” any ERISA plan there is no “connection” between ERISA and CalSavers.

In March 2020, the same federal district court dismissed the lawsuit for a second time. In its second opinion, the court again confirmed that ERISA does not preempt the CalSavers program. The court said CalSavers does not create an “employee benefit plan” under ERISA because an “employer” does not establish or maintain the program. Specifically, the court said, “Actual employers have no discretion in the administration of CalSavers and do not make any promises to employees; employers simply remit payroll deducted payments to [CalSavers] and otherwise have no discretion regarding the funds.” In June 2020, HJTA appealed the decision to the United States Court of Appeals for the Ninth Circuit. That same month, the Trump Administration’s DOL filed an amicus brief supporting HJTA’s appeal. In its brief, the DOL argued that CalSavers “takes away the freedom of choice that lies at the core of ERISA by forcing employers either to establish their own ERISA plans or to maintain an equivalent plan under [CalSavers].” The brief further claimed that CalSavers is preempted by ERISA because it “disregards and runs afoul of ERISA’s statutory scheme by effectively requiring employers to maintain such plans …”

Although the Ninth Circuit Court of Appeals has yet to decide the case, the DOL’s decision to withdraw its amicus brief remains significant for a few reasons.

First, the withdrawal may indicate that, under President Biden, the DOL may be willing to return to an Obama-era interpretation of ERISA preemption that is less restrictive. Under Obama, the DOL in 2016 had issued a final rule that eliminated the federal barrier to states that seek to implement programs like CalSavers.

Second, the withdrawal may reflect Biden’s campaign promise to allow workers without a pension to have access to an automatic 401(k). That promise could be met by enabling state-run auto-IRA programs for private sector employees. To date, California, Illinois, and Oregon are running programs. Connecticut, Colorado, and Maryland will start programs this year. According to Georgetown University’s Retirement Initiative, another 20 states and cities have introduced legislation to create programs or establish a study group.

Finally, the withdrawal is consistent with President Biden’s nomination of Julie Su for Deputy Secretary of Labor. Currently, Ms. Su serves as secretary of California’s Labor and Workforce Development Agency, where she worked on the CalSavers program. During her recent U.S. Senate confirmation, Ms. Su said she would focus not only on protecting workers but on helping people with retirement security.