State-run retirement savings plan ready to launch

It’s been a while since the state rolled out a new mult-billion program that could touch the lives of 7.5 million Californians, not to mention one intended to be self-supporting with no money from taxpayers.

But now CalSavers is scheduled to launch a pilot Nov. 19 for an on-the-job retirement savings plan, formerly known as Secure Choice, that will be open to all eligible employers next July.

It’s facing opposition from a coalition of business groups and a taxpayers suit to shut it down.

Employers with five or more employees, who do not offer a retirement plan, will be required by state law to offer the CalSavers plan to their employees in three waves based on employer size. Employees can opt out.

After the pilot and the voluntary period beginning next July 1, employers with 100 or more employees must register with CalSavers by June 30, 2020, employers with 50 to 99 employees by June 30, 2021, and employers with 5 or more employees by June 30, 2022.

What some call an “automatic IRA” payroll deduction is said to be a proven way to increase retirement savings. Nearly half of California workers are projected to retire into economic hardship at or below 200 percent of the poverty level, a UC Berkeley report said.

“CalSavers will finally level the playing field for millions of hardworking Californians who don’t have access to a retirement program at work,” Katie Selenski, CalSavers executive director, said last week. “They’ll have a simple, portable way to save for their futures with low-fee, professionally managed investments, and it’ll be easy for employers to facilitate.”

For employees who do not opt out, the standard contribution to CalSavers starts at 5 percent of pay and increases 1 percent of pay each year until reaching 8 percent. Employees can change contribution rates, pause contributions, and opt out and return later.

If the employee doesn’t make a different choice, the first $1,000 in contributions goes into a low-risk money market fund. Then contributions go into a target date fund that shifts to more conservative and less risky investments as the employee nears retirement age.

Employees also can choose among other mutual funds also managed by State Street: A high-quality bonds fund and a fund combining domestic and international stocks.

Contributions go into Roth IRAs, unless the employee chooses a traditional IRA. The pilot is expected to start with about 20 diverse employers and grow to 50 or more. The first contributions are expected to start flowing in January.

The total CalSavers administrative and investment fee, now 0.82 to 0.92 percent of assets depending on the investments chosen, will drop significantly as the fund grows. The total fee, capped at 1 percent after six years, will repay a state start-up loan of $3 million so far.

To avoid state costs, the initial $1 million for a feasibility and market study was paid for by donations. The Laura and John Arnold Foundation, often vilified by unions for supporting public pension reform, contributed a $500,000 matching grant.

Two large public employee unions, the California Teachers and the SEIU, each contributed $100,000. Public employee unions played a major role in a national drive to create state-run savings plans for the private sector. (See report here)

Public unions think improving private-sector retirement can help counter pressure to cut government pensions or, following the corporate trend, switch to 401(k)-style individual investment plans that create no long-term debt for employers.

The nine-member CalSavers board has looked at a public union-backed “pooled IRA” that could gradually, by diverting some of the investment yield in good years, build a reserve large enough to replace some of the losses in a bad year.

Under the CalSavers authorizing legislation, SB 1234 in 2016 by state Sen. Kevin de Leon, D-Los Angeles, employers have no liability and the state does not guarantee the CalSavers fund.

CalSavers chart shows potential retirement savings over 40 years

A federal judge hearing the Howard Jarvis Taxpayers Association request for an injunction halting CalSavers, and a ruling that CalSavers is invalid under federal law, directed both sides in the case to file supplemental briefs by Nov. 15.

The key issue is whether CalSavers is exempt from the federal Employee Retirement Income Security Act of 1974 (ERISA). An exemption is required by the CalSavers authorizing legislation to avoid exposing employers to liability and burdensome federal regulations.

De Leon and state Treasurer John Chiang, who has provided an office and staff aid for CalSavers, joined officials from other states in successfully urging the Obama administration to provide a “safe harbor” labor regulation exempting state opt-out savings plans from ERISA.

After President Trump took office last year, the Republican-controlled Congress, through the rarely used Congressional Review Act, passed fast-track legislation signed by the new president that repealed the 2016 safe harbor regulation.

A big issue now is whether mandatory state opt-out savings plans are exempt from ERISA under an earlier regulation. The supplemental briefs ordered by U.S. District Judge Morrison England are for interpretations of the 1975 safe harbor’s “completely voluntary” requirement.

Gov. Brown sent a letter to the California congressional delegation last year urging opposition to the legislation repealing the 2016 safe harbor regulation. He said CalSavers aims to enroll workers who historically have not been served by the savings industry.

“I understand that Wall Street institutions strongly object to California and other states setting up such systems,” Brown said. “They think the dollars that move into Secure Choice (now CalSavers) should instead flow into their own products.”

As the suit to block CalSavers was filed in May, Jon Coupal, president of the Jarvis taxpayers group, said there is no need for the program and pointed to the large debt or unfunded liability of two state pension systems.

“Private employees already have access to Social Security which is backed by the full faith and credit of the federal government. Moreover, individual retirement accounts (IRAs) are easy to set up,” Coupal said.

“Given the poor performance of CalPERS and CalSTRS, both in terms of investment performance and governance, why would we give state politicians and bureaucrats access to another pension program?”

A coalition of 30 business groups led by the California Chamber of Commerce urged the state Office of Administrative Law to reject CalSaver regulations submitted on Oct. 24.

The business coalition said the CalSaver regulations do not meet the 1975 safe harbor’s requirement that automatic enrollment be “completely voluntary” to be exempt from ERISA.

“This (CalSavers) automatic enrollment is not ‘completely voluntary’,” said the letter signed by Marti Fisher, a Chamber lobbyist. “Only the opportunity to opt out is voluntary.”

A spokeswoman said Fisher will revise her comments based on an edited version of the regulations expected to be approved by the CalSavers board this week and refiled with the Office of Administrative law on Nov. 8.

Upon filing, a five-day public comment period and a 10-day Office of Administrative Law review period begin simultaneously. If the regulations are approved, they would take effect on Nov. 19.

choice

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 5 Nov 18

4 Responses to “State-run retirement savings plan ready to launch”

  1. Stephanie H Says:

    Why would any Californian object to our citizens contributing to a pool for their retirement?
    I see no reason to object to workers contributing to their retirement. There are ways to hold off if times require holding off. The only issue is pushing a computer button on payday. If that.
    Social security is under constant attack by the current US government. It only makes sense that all Californians have a safe mechanism to save for their retirement especially when the chamber of commerce appears to prefer our seniors live in poverty or in the streets as homeless.

  2. Marwick Says:

    Roth IRA accounts are already available for workers. The CalSavers plan is not a guarantee, it’s just a savings plan where employees choose their own investments. Some employees will do well (via dollar cost averaging into a diversified stock index fund), and some won’t. The .75-1% middleman fee is costly compared to brokerages. Seems like a bad idea that mostly benefits the middleman via generated fees.

  3. Martin Lawford Says:

    Stephanie H, no one is objecting to workers contributing to their retirement savings. They have been free to contribute to IRA’s since 1981 and no one is proposing to keep them from it. What is objectionable is doing something with an employee’s money which he didn’t give you permission to do. That is an unauthorized transaction which any bank or brokerage could be fined and sued for doing, yet you seem to think it’s OK when an employer does the same thing. If an employee doesn’t put money into an IRA, which investment houses and banks are constantly urging him to do, it is because he jolly well does not want to no matter how much you and I think he should. Unless we are prepared to treat him like a child forced to save some of his allowance, we must respect his choice because it’s his money.

  4. Anonymous Says:

    Interesting replies Martin and Marwick. Looking at the CalSavers website, it looks like there are only going to be about four investment choices at launch. So not much wiggle room for folks to make their own choices.

    The fees start at a max of 0.92% depending on the investment choice. Also available in the public board docs is the contract with the administrator, which contains an aggressively declining fee scale as the program reaches scale. It looks like the fees will be in the range of 0.30% once the program reaches scale, which is highly competitive for a program of this type.

    Martin, I think your argument is a bit extreme. The program is completely voluntary for employees – they can opt out at any time or pause or adjust contributions at any time.

    What is important here is that research shows the most effective way to get people on the path toward retirement security is with a automatic enrollment, payroll deduction retirement plan available at the workplace. Moreover, something like 4% of middle income folks who do not have access to a plan at work, will actually go out a get one on their own. Leaving 96% of those workers without a savings vehicle.

    All CalSavers is doing is making sure that all CA workers have access to a retirement savings program at work so they can save an grow their own money. If they choose not to participate, that is their mistake. But at least nearly every Californian will have easy access to the tools. Seems like a no brainer to me. If I had a small business I would be excited to sign up

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