Private firms offer to run state retirement plan

A board working on a proposal to enroll most small business employees in a state-run retirement savings plan, unless they opt out, was told last week that small technology-focused financial firms could do the job.

The founders of three firms that offer 401(k)s and other retirement plans to small businesses did not object to competition from the state. They offered their services, acknowledging that several small firms may be needed due to the size of the job.

“We’ve got the systems, the people to support this type of an initiative, and we are all excited,” said Pete Kirtland of Aspire Financial Services. “Whether or not we participate, it’s the right thing to do.”

Chad Parks of Ubiquity added: “You are looking at three companies here who have decided to tackle this problem. So, there are people out there who are willing and able to do this.”

Michael Kiley of Plan Administrators Inc. replied when asked about obstacles: “You could do a lot of damage in the design. You could make every one of us run away if you don’t involve us.”

The three firms at a Secure Choice board meeting last week are part of a growing number of small firms using modern computer technology to offer small businesses retirement plans with lower cost and more service, the New York Times reported in September.

Large traditional financial firms are said to often have higher costs because, among other things, they tend to focus on selling investment funds and to have outdated technology designed to serve a few employers with many employees.

Kirtland

Kirtland

The Secure Choice program was created to provide a job-based retirement savings plan for about 6.3 million California workers without access to one. Only 45 percent of workers age 25 to 64 have an employer plan, less than the 53 percent national average.

An “automatic IRA” or payroll deduction that puts money into a tax-deferred account, unless a worker opts out, is said to be a proven way to boost savings. There is growing concern that many private-sector workers have little more than Social Security.

“The lack of plans is fueling a retirement-savings crisis,” a Bloomberg news story said last month. “Few workers save anything outside of employer-sponsored plans. Only 8 percent of taxpayers eligible to set aside money in an IRA or Roth IRA did so in 2010, according to the IRS.”

Even big companies are concerned that employees aren’t saving enough. Google, Credit Suisse, Apache and others have begun automatically diverting more than the standard 3 percent of pay into 401(k) plans, the Wall Street Journal reported last month.

Parks

Parks

In Washington, D.C., there were two well-publicized meetings last month on the need for more private-sector retirement saving.

The Bipartisan Policy Center held a one-day conference on whether “technology, new business models, and different plan designs” could boost retirement savings, including for workers who have a job-based retirement plan but aren’t saving enough.

The U.S. Chamber of Commerce and other groups told a Congressional panel that “multiple-employer plans,” perhaps offered by state chambers and trade associations, could cut costs and ease administration, allowing more businesses to offer retirement plans.

President Obama made several unheeded calls on Congress to create an “automatic IRA” before launching “MyRA” last year, a paycheck-deduction bond savings program that is off to a slow start.

After years of trying, Sen. Kevin de Leon pushed a Secure Choice bill through the Legislature (SB 1234 in 2012) despite opposition from Republicans and employer, insurer, financial planner and taxpayer groups.

But Secure Choice must run an obstacle course: a legal and market analysis not paid for by the state, approval for IRA-like tax treatment, exemption from a federal pension law (ERISA), a self-sustaining plan, and final legislative approval.

With a $500,000 matching grant from the Laura and John Arnold Foundation (vilified by public unions for pushing pension reform), Secure Choice raised $1 million and hired Overture to do the market analysis and K&L Gates for the legal analysis.

Kiley

Kiley

The U.S. Labor department has not yet ruled on the ERISA exemption. Labor Secretary Tom Perez also is working on a contested “fiduciary” rule for brokers and financial advisers requiring them to act in the best interest of small business customers.

State Treasurer John Chiang is aiding Secure Choice with staff support, meetings with business groups around the state, and urging federal action during two trips to Washington, D.C.

De Leon, who became the Senate leader last year, is now in a stronger position to get final approval of a Secure Choice plan. Public employee unions support plans that would help close the gap between private-sector retirement and government pensions.

Yvonne Walker, president of the largest state worker union, SEIU Local 1000, is a member of the Secure Choice board. She joined Jon Hamm, Highway Patrol union executive, in a proposal at a legislative hearing in 2011 on Gov. Brown’s pension reform.

Look at ways to improve retirement security for private-sector workers, the two union officials told lawmakers, instead of only focusing on cutting public employee retirement benefits.

The California Chamber of Commerce and the California Manufacturers and Technology Association reminded the Secure Choice board in September that they only lifted their opposition to allow a feasibility study.

Among a long list of concerns in their four-page memo: The employer cannot bear the risk for employee investments or decisions or for an under-funded program, and the employer should not be given the burden of educating employees about the program.

“The market analysis has revealed that the target market for this program includes individuals who are risk averse and lack basic investment knowledge,” said the business groups. “The research suggests that the biggest challenge to the program will be positioning and explaining the investment options to potential users.”

The Secure Choice board was told last week that when employers with five or more employees are directed to offer employees a retirement plan, some may choose an alternative to Secure Choice such as an IRA or Simplified Employee Pension.

The discussion briefly turned to competing with brand names, lower-cost products and “adverse selection” if Secure Choice ends up with only employers ignored by the aggressive marketers.

“If in fact your desire is just to make sure that these 7 million people are covered,” said Kiley of Plan Administrators Inc., “candidly the day you put the mandate out you don’t have to do anything further. They will be covered. The market will see to it.”

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 2 Nov 15

12 Responses to “Private firms offer to run state retirement plan”

  1. larrylittlefield Says:

    Those private sector employees are paying for the pensions of public sector employees.

    So how much will the public sector employees pay for the pensions of the private sector employees?

    Will they be equal? Will it be possible for the private sector workers to spend more years in retirement than working?

    And will it be the case that the private sector pensions could be enhanced at any time in exchange for political support, but never reduced regardless of the severity of the consequences?

  2. spension Says:

    Want to know what happened to the private sector DB plans? Fraudulent takeover by private sector executives. Read Wall Street Journal reporter Ellen Schultz’ book, `The Retirement Heist’. Give credit where credit is due: the private sector executives absconded with the plans of their employees. Not the public sector.

    Fraud in the private sector does not justify complete elimination of public sector DB plans. Of course California and some other states have run their plans poorly, with absurdly high and unsustainable benefits, like, 3%@50, which itself is based not the ability of military retirees to retire at 37.

    Modest DB plans are the most economical deal of all. Even CalPERS has low fees relative to the private sector investment houses.

    The plan in this post: if they can do it for a gross, total fee less than 0.05% of assets held, it might be alright.

  3. Dr. Mark H. Shapiro Says:

    We’ve seen how well the private financial industry has done with 401Ks. It has enriched itself at the expense of retirees with a plethora of high-fee options.

  4. getReal Says:

    Public employees do generally get better pensions than private, at least for the lower-paid through mid-level job categories. At the top (management), not so much due to generally lower salaries than for top private managers (and no stock benefits). Safety employees are an outlier. But public employees also (yes, none of the screamers accept this, but it’s a fact) get paid less for similar work than private except at entry level (most public entry-level jobs do pay more than minimum wage). A decent pension is part of the salary package, so if it’s eliminated or reduced the salary has to (eventually) go up to compensate or nobody rational will work there, union or no union. Current expense vs. deferred expense that can be reduced by investment returns …

    The people, directly (initiatives) or through their representatives, have over time passed laws mandating provision of various services and regulations, provision and enforcement of which are paid for with taxes. Public employees are usually (but not always – some things are contracted out) used for that work. If you want to change that and make it stick, you need to change the mandates – not on employees, but on services. Are all those public services and regulations necessary? If you think not, you need to convince the appropriate representatives, or the public by initiative, that they’re not and repeal or modify the appropriate laws rather than adding new ones. If there’s no work to do, the employees (contracted or public) will be laid off, or moved to other work that’s still required but understaffed. Fewer employees means less salary and pension expense. Yes, it probably also means higher welfare expense, since private business is only adding jobs at minimum wage.

    Continuation of the usual drag ’em down attacks ultimately results in: Welcome to Dickens’ London. Hope you like it. Some of you probably do, as long as everybody else is more miserable than you. I like schemes that improve retirement prospects for everybody. The fairest approach is to make everybody’s life better, not to drag everybody down to the lowest level.

  5. Tough Love Says:

    Quoting Spension …. “Fraud in the private sector does not justify complete elimination of public sector DB plans. ”

    You’re right.

    But the collusion between the Public Sector unions and our elected officials …. with the former BUYING the favorable votes of the latter (on Public Sector pay,pensions, and benefits) with Campaign contributions and election support, and resulting in the undeniably grossly excessive Public Sector pensions & benefits …… an outrageous betrayal of the Taxpayer, indeed DOES.

  6. spension Says:

    Collusion between public sector unions & politicians… of course, welcome to the US, where free speech and a democratic political process always have resulted in that relationship.

    But you omit discussion of the parallel collusion between huge public contractors (General Dynamics, United Health, etc) that does just the same thing. Not to mention collusion with Wall Street.

    Two wrongs don’t make a right. But only identifying one wrong or only a subcategory of wrongs doesn’t help.

  7. SeeSaw Says:

    Money will always be part of any picture. TL is shouting at a dead horse. I was part of a union and we gave our favored City Council candidate $300 for the campaign–no agreements for special treatment and we never had any. Well Rubio is getting his money from a billionaire–don’t suppose he is expected to sponsor any certain bills for that guy,right, TL?

    Make no mistake, “Get Real”–we all pay for the independent contractors through our taxes. And, in case TL needs to be reminded–ha-ha–public-sector workers pay taxes too.

  8. ctweber Says:

    It seems to me that private sector workers would be better served if they had a defined benefits plan. That way they would know how much they would be getting each month and as a result could better plan their retirement.

  9. ctweber Says:

    It is time to sign up private workers into a defined benefits plan. This time let the state run it. That will eliminate the problems that existed before of the bosses running off with the money.

  10. Lou S Says:

    A few weeks ago I asked an insurance company to market a plan where the employee / client takes a percentage of compensation in employer contributions toward the employees retirement that gets invested along with a matching employee contribution. The hitch is if the employee and any secondary beneficiary spouse die prior to retiring, the employer gets to keep all the money. I was told this would be a tough – near impossible sell.

    But in fact, DB plans do just that. They fund only to AVERAGE lifetimes. So lots of folks have to die early so those living past the average can continue to draw a retirement. It is essentially an insurance risk pool and, especially at 1/2 of 1 percent maximum allowed administrative expense, an exceptionally inexpensive way to fund an incredibly great retirement that keeps retirees functional, supporting the economy and paying taxes until they die.

    So explain to me why the private sector does not use DB plans again?

  11. spension Says:

    What you refer to is elimination of longevity risk, Lou S, and is well known… if you have your own 401(k) or IRA, your `risk pool’ is usually one contributor for two beneficiaries (wage earner and spouse).

    So careful planning means you have to plan for money to last until a beneficiary lives into their 90’s. That is very expensive.

    When the risk pool is huge, the early mortalities pay for the long-lived. This is indeed like insurance, and on the average saves money.

    But it does confound the accounting… becomes like insurance… and BTW, often in DB plans there was a `death benefit,’ modest, but something.

  12. SeeSaw Says:

    My 457 has beneficiaries until the account is empty. My spouse is my beneficiary and my adult children receive what’s left if he dies. The rules are the same as for all IRA-like plans. Each beneficiary must retitle the account and be subject to the rules that govern their own longevity, forcecast. They must not take actual control of the funds before they are rolled over,or taxes are immediately due

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