California proposal for state-run retirement plan for private-sector workers moves forward
By James Rufus Koren, Contact Reporter
March 28, 2016 - LA Times
California has taken a step closer to becoming the first state to make
retirement savings accounts a near-universal benefit for workers with a plan
that lawmakers hope will help ease an expected massive shortfall in retirement
savings.
A state board Monday sent a set of recommendations to the Legislature calling
for the creation of the California Secure Choice Retirement Plan — essentially a
401(k) plan operated by the state and open to private-sector workers whose
employers don't offer a retirement savings plan.
Employees of any company with at least five workers would be eligible to
participate. That would cover an estimated 6.8 million workers, about a third of
California's labor force.
The plan calls for eligible workers to be signed up automatically by their
employers and have 2% to 5% of their wages invested in the plan, unless workers
opt out.
Business groups have questioned whether the plan could cost employers or make
them liable for investment losses or other problems. But state officials have
said the retirement plans would be similar to those available to many
private-sector employees and, unlike pension plans for state workers, would not
be funded or guaranteed by employers or taxpayers.
Retirement savings advocates say the kind of state-run retirement accounts
being considered by California and a handful of other states could help millions
of Americans — especially lower-income workers, who are the least likely to save
— put away at least a small retirement nest egg.
"These are plans that would be set up for employees who have nothing," said
Karen Friedman, policy director for the advocacy group Pension Rights Center.
"It's a way of getting people saving. But we look at them as modest savings
plans. They're not a replacement for good, old-fashioned pension
plans."
For young workers who start out saving 5% of their wages, the plan —
depending on investment returns — could ultimately provide about one-third of
the money they'll need to get through retirement, according to Overture
Financial, a consulting firm that worked on the plan.
The National Institute on Retirement Security estimates that about 45% of
private-sector workers are not offered a retirement savings plan through their
employer. And though workers without an employer-sponsored plan can create
individual retirement accounts and other savings plans on their own, AARP
estimates that only about 5% of such workers do so. That has led to growing
concerns of a looming retirement crisis, as large numbers of baby boomers move
into their retirement years without traditional pensions with fixed monthly
payments.
The Secure Choice Retirement Plan has been in the works since 2012, when
state Sen. Kevin de León (D-Los Angeles) wrote a bill calling for the creation
of a board to look into the feasibility of a state-run retirement plan for
private workers.
At a news conference Monday, De León mentioned his aunt, who worked as a
housekeeper for years but didn't save for retirement, as representative of the
millions of Californians who don't have enough — or any — savings.
"My aunt had to keep working until her body physically gave out. She relies
on me as her 401(k) to help her through her retirement," he said. "Nearly 50% of
middle-income workers are at real risk of sliding into poverty when they can no
longer work."
The Secure Choice Retirement Savings Investment Board created by De León's
earlier bill recommended that the Legislature require employees be enrolled in
the program automatically, though they could choose not to participate. The idea
is that workers are much more likely to save for retirement if that's the path
of least resistance.
"It begins to put in the minds of many people that savings can be automatic,"
said Blanca Castro of AARP, which supports the plan.
The board's recommendations will now be incorporated into a bill that De León
introduced last month. Similar proposals are under consideration in Oregon,
Illinois, Connecticut and other states, though publicly run retirement plans are
not yet open for business in any state.
An Obama administration program launched last year, called MyRA, as in "my
retirement account," also aims to give workers a retirement savings option if
they don't have a plan through their jobs. But the MyRA program allows workers
to save only $15,000 before they have to move their cash into a private
account.
De León said he hopes that his bill will pass by July, allowing it to become
law in January. Still, there are plenty of details to be hashed out and the plan
could be more than a year away from investing money on workers' behalf.
"We have lot of figuring out to do," said Christina Elliott, acting executive
director of the Secure Choice investment board. "Clearly we won't be enrolling
on Jan. 1, 2017."
A key issue will be where to park workers' contributions. The board
recommended that the retirement plan initially invest in U.S. Treasury bonds or
other ultra-safe investments while officials study whether other types of
securities — mutual funds, for instance — should be made available.
There's also the question of how money will be taken from workers' checks and
how their investments will be managed.
Elliott said the goal is to minimize employers' role in the process. They'll
be responsible for enrolling workers in the program and deducting money from
their checks, then passing that money along to the board.
The board, in turn, will hire a third-party investment firm — think 401(k)
giants Vanguard Group or Fidelity Investments — to manage that money.
The state plan could be big business for an investment manager. Overture
Financial estimated that the average worker eligible for the plan makes about
$35,000 a year, and that at least 70% of eligible workers would participate.
If most workers save about 3% of their income, that represents about $5
billion in assets after just the first year.
Other questions to be sorted out include whether workers will be able to take
money out of the plan before retirement age and how the funds will be
distributed once they do retire. "We don't want folks to save, do a good job, be
consistent, then take a big lump sum and go to Vegas," De León said.
De León's 2012 bill setting the retirement plan in motion passed along party
lines and was signed by Gov. Jerry Brown. His new bill incorporating the board's
recommendations, SB 1234, will have its first hearing in the Senate Committee on
Public Employment and Retirement on April 22.
Marc Lifsher, a spokesman for California State Treasurer John
Chiang, said he is optimistic that the new legislation to enact the plan
will also make it through the Democratic-controlled Legislature. "De León has a
lot of clout. He wants to get it passed this legislative session," Lifsher
said.