It had a name, Secure Choice, and now an attempt to create the first state-run “automatic IRA” for workers with no retirement plan has its first donors, authorization to hire consultants and a favorable response from a wide range of groups asked for advice.
The author of the program, Sen. Kevin de Leon, D-Los Angeles, may become the next leader of the state Senate. So the plan being developed by a nine-member board could have a strong advocate when it comes back to the Legislature for approval.
A De Leon bill authorized a market and feasibility study (barred from using state funds) for a requirement that employers, with five or more workers and no retirement plan, provide payroll deductions for a new Secure Choice retirement plan.
An automatic paycheck deduction, perhaps 3 percent, is expected to increase saving by 6.3 million Californians without a job retirement plan. Automatic deductions for employer-sponsored 401(k) plans are said to sharply increase savings.
The Secure Choice board plans to hire a law firm to help develop a plan that can be approved by the IRS for tax deferral and by the U.S. Department of Labor for compliance with ERISA, the law covering private retirement plans.
The board hopes to send a plan to the Legislature for approval next year. The De Leon bill, SB 1234 in 2012, got little or no support from Republicans and was opposed by employer, insurer, financial planner and taxpayer groups.
Last week, the board was told the Laura and John Arnold Foundation is making a $500,000 matching grant. The SEIU state council voted to contribute $100,000, which with the Arnold match provides a total of $200,000 so far.
“We are really pleased with both organizations because these — our retirement community has often cast as divergent — have stepped up to support our effort to figure out how we might build this important first-of-a-kind program,” Grant Boyken, Secure Choice acting executive director, told the board.
“I think this is significant progress toward our $1 million target, and we hope it will generate momentum that will attract funds from a diverse group of donors,” said Boyken, who with others from state Treasurer Bill Lockyer’s office works part-time on the program.
Arnold, a Texas hedge fund billionaire, has been vilified by labor for contributing to pension reform groups. Arnold contributed to Secure Choice when asked by De Leon and the Service Employees International Union, the Sacramento Bee reported.
The Secure Choice board unanimously voted last week to direct staff to hire a project management consultant, who will help with the hiring of a law firm and then with a request for proposals for market and feasibility studies and plan design.
About half of U.S. workers do not have access to an employer-sponsored retirement plan, neither a pension nor a 401(k)-style individual investment plan. Social Security is often said to be inadequate, and Americans are living longer.
During his State of the Union address last week, President Obama repeated his call for an automatic IRA, unheeded by Congress in the past. This time Obama said he would use an executive order to create what he calls “MyRA,” a paycheck-deduction savings bond program.
“MyRA guarantees a decent return with no risk of losing what you put in,” the president said of the new program he authorized later in the week with a signing ceremony at a Pennsylvania steel plant.
“And if this Congress wants to help, work with me to fix an upside-down tax code that gives big tax breaks to help the wealthy save, but does little or nothing for middle-class Americans. Offer every American access to an automatic IRA on the job, so they can save at work just like everybody in this chamber can.”
Workers can make a startup contribution to “MyRA” for as little as $25, and then contributions can be as small as $5. The federal government covers the administration fee, which on some small accounts would be enough to eat up the investment earnings.
The goal is to get workers started on building a retirement “nest egg.” When a MyRA account reaches $15,000, the savings would be rolled into a private-sector Roth IRA.
At the Secure Choice meeting last week, board member Heather Hooper suggested that “we reach out to the people who designed” a new 401(k)-style automatic enrollment plan in Britain required for employers not offering a retirement plan.
The National Employment Savings Trust, enacted in 2008, is being phased in over a decade. By 2018 the minimum contribution from employees will be 4 percent of pay with a 3 percent match from employers.
Secure Choice would not require employers to contribute to the plan. But opponents of the De Leon bill argued that employers will be burdened with distributing forms, answering questions, collecting opt-out forms and transferring contributions.
Last September the Secure Choice board issued a request for information to get advice about developing the program. The 27 responses came from financial services, academics, policy institutes, trade organizations and others.
Boyken told the board the generally favorable response was that the program “would be workable.” He said some companies said they would compete to offer “products and services” through the program if it was up and running.
But as with the De Leon bill two years ago, there were doubts and concerns, mainly from life insurers and business groups, about the state competing with private retirement services, the burden on business, legal issues and the need for the program.
Some of the issues that may be considered as the market and feasibility studies are used to help design a program:
Should investments aim to preserve capital, perhaps with a costly guaranteed minimum return, or seek higher returns with riskier investments to provide more for retirement?
Would a contribution of 3 percent of pay be low enough to attract workers, while still providing an adequate supplement for Social Security, or should the contribution have an escalator?
Eric Lawyer, another member of the treasurer’s staff, told the board Secure Choice is part of a national debate about improving retirement for many private-sector workers.
He mentioned an “R-bond” pushed by a federal official that would become MyRA and stalled legislation for retirement plans in several states: Indiana, Ohio and Illinois. An Oregon bill was said to be broadened to look at all options, not just a state-run plan.
“I think what this does show is that regardless of whether California’s Secure Choice plan ultimately gets implemented, we will have done a lot of work advancing the discussion and providing some meaningful studies and cases that this is something that’s needed,” Lawyer said.
“But we operate under the assumption that it will work,” Boyken quickly added, getting a laugh from some of the board members.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 3 Feb 14