When a South Dakota state employee asked the state to deduct money from her paycheck to buy a retirement annuity, did SDCL 3-10-5 mean she could only use an insurance company? Or could she use her bank or her investment broker instead?
Plain-English summary
Some South Dakota state agencies in 1985 had been telling employees that SDCL 3-10-5, which authorized the state to withhold payroll funds for retirement annuity purchases, only worked with insurance companies. Senator Walter Conahan wanted to test that reading: could employees instead direct withheld funds to a bank, an investment broker, or any other licensed provider that sold retirement annuities?
AG Mark Meierhenry's answer was yes. SDCL 3-10-5 spoke broadly about "a company or organization licensed to do business in the state of South Dakota." The statute did not say "insurance company." It said "company or organization." Banks and investment brokers that could legally sell retirement annuities qualified.
The AG paired this with a regulatory reminder: retirement annuities are securities. Anyone selling them in South Dakota had to comply with SDCL chapter 47-31, the state securities act. That meant registration of the security or qualification for an exemption, and licensing of the seller. So the broader reading of SDCL 3-10-5 didn't open the door to unlicensed sales. It just confirmed that the door was open to any licensed seller, not just insurance companies.
The practical impact: state employees gained access to a wider competitive market for retirement products. Banks and brokers could compete with insurance companies on price, performance, and product features.
Currency note
This opinion was issued in 1985. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. South Dakota's state employee retirement framework has evolved substantially since 1985, and the South Dakota Retirement System now plays a central role in employee retirement planning. The federal regulatory regime for retirement products (including ERISA) and state securities laws have also developed significantly.
What the opinion meant at the time
For state employees, the opinion expanded retirement planning options. An employee who had a relationship with a bank or a broker no longer needed to redirect to an insurance company simply because of an agency's narrow reading of the statute. Competition among providers tended to mean better terms for the employee.
For state agency payroll administrators, the opinion eliminated an excuse for refusing to honor an employee's annuity request. If the employee designated a bank or broker that was licensed in South Dakota and legally selling annuities, the agency had to process the deduction.
For banks and investment brokers, the opinion opened a marketing avenue. State employee payroll-deduction sales had been an insurance-company franchise; the AG ruling let other providers compete for the same business.
For securities regulators, the opinion reinforced that the SDCL chapter 47-31 framework applied to retirement annuities. Securities registration and broker licensing remained mandatory.
For insurance companies, the opinion meant losing a captive market position. Some companies had been the default beneficiaries of state employees' annuity purchases. Now they had to compete.
Common questions
Q: What was SDCL 3-10-5 designed to do?
A: It set up the payroll-deduction mechanism that let state employees commit part of their salary to retirement annuities without having to pay separately each month. The employer (the state) handled the deduction and forwarded the money.
Q: Was there a cap on how much could be deducted?
A: SDCL 3-10-5 did not impose a fixed dollar cap. The amount was designated by the employee. Federal tax law set the upper limits on tax-favored annuity contributions.
Q: Did the broader reading affect employer contributions?
A: SDCL 3-10-5 was about employee salary withholding. Employer pension contributions ran through a different statutory framework, primarily the South Dakota Retirement System (SDRS).
Q: What did SDCL chapter 47-31 require?
A: Registration of the security being offered (or an exemption) and licensing of the broker or sales representative. The chapter implemented the state's "blue sky" regulation of securities sales.
Q: Why were retirement annuities classified as securities?
A: Both state and federal securities law treated certain annuity contracts as securities, particularly variable annuities where the contract holder bore investment risk. Fixed annuities sold by insurance companies were sometimes classified differently. The AG opinion's reminder was a generalized warning that the SDCL chapter 47-31 requirements had to be checked for each product.
Q: Could the employee change providers later?
A: SDCL 3-10-5 spoke of withholding "the amount designated from the salary of the employee" and purchasing the annuity "for such employee." The employee remained in control of the designation. Changes to provider would normally require re-execution of the authorization.
Background and statutory framework
South Dakota's state employee retirement framework in 1985 had two layers. The SDRS provided defined-benefit pension coverage. SDCL 3-10-5 provided a mechanism for employees to supplement that coverage by directing payroll funds into private annuity products. The supplemental savings model was common across states in the 1980s, though federal tax-favored 403(b) and 457(b) plans were just becoming the dominant vehicles.
The "company or organization licensed to do business" language in SDCL 3-10-5 was broad statutory drafting. It did not single out insurance companies. The narrow reading some agencies had adopted was either a holdover from earlier custom or a misreading of who was actually authorized to sell annuities. The AG opinion did not have to wrestle with much textual ambiguity; the statute said what it said.
The SDCL chapter 47-31 reminder reflected the AG's office practice of flagging adjacent regulatory requirements when opining on statutory authority. Just because SDCL 3-10-5 allowed broader provider participation did not mean those providers were exempt from securities regulation. The two frameworks operated in parallel.
The opinion was short but substantively useful for state employees who had been told they had fewer options than the statute actually gave them. AG opinions of this kind often did the quiet work of correcting administrative under-readings of statutes.
Citations and references
Statutes:
- SDCL 3-10-5 (state withholding for employee retirement annuity)
- SDCL ch. 47-31 (securities registration)
Source
Original opinion text
February 5, 1985
Honorable Walter C. Conahan
State Senator
101 Washington Road
Volga, South Dakota 57071
OFFICIAL OPINION NO. 85-06
Retirement annuities
Dear Senator Conahan:
You have requested an official opinion based upon the following factual situation:
FACTS:
SDCL 3-10-5 allows the state to withhold a designated amount of salary for an employee to purchase a retirement annuity from 'a company or organization licensed to do business in the state . . .' Some agencies of state government have taken this passage to apply only to insurance companies.
Based on the above facts, you have asked the following question:
QUESTION:
Can an employee purchase a retirement annuity through the provisions of SDCL 3-10-5, from companies or organizations other than insurance companies, such as investment brokers, banks etc., who are legally able to sell retirement annuities?
SDCL 3-10-5 provides:
When so authorized by an employee, it shall be the duty of the employer to withhold the amount designated from the salary of the employee and to purchase a retirement annuity from a company or organization licensed to do business in the state of South Dakota, for such employee and to make the periodic payments on such retirement annuity according to the terms of the annuity contract.
Based on the foregoing statute, it is my opinion that the answer to your question is yes. A bank or investment broker may sell retirement annuities to state employees pursuant to SDCL 3-10-5 so long as the bank or investment broker is licensed to do business in this state.
Since retirement annuities are securities, you are reminded that the requirements of SDCL Chapter 47-31 must be met.
Respectfully submitted,
Mark V. Meierhenry
Attorney General