California Governor Jerry Brown has signed the California Secure Choice Retirement Savings Act, taking the next step in implementing one of the nation’s first state-sponsored, auto-enrolled retirement savings programs for the private sector.
The measure is anticipated to impact as many as 7 million private sector workers in California who did not previously have access to tax-advantaged retirement savings accounts in the workplace.
The California Secure Choice Retirement Savings Program has received a lot of positive press for bringing much-needed attention to a difficult policy issue—but others warn the program could do more harm than good if not implemented and managed carefully. According to lawmakers who voted in support of the measure, Secure Choice is nothing more or less than “a completely voluntary workplace retirement savings plan that enables participation through automatic employee payroll contributions into a personal retirement account managed by the California Secure Choice Retirement Savings Investment Board.”
Practically speaking, employees will be defaulted at 3% of salary into “a personal retirement plan, with the option to opt out or change contributions at any time.” There will be automatic escalation of contribution rates up to 8% of salary, with participant ability to stop or change the rate.
“For up to the first three years of the program, the state’s management board will establish managed accounts invested in U.S. Treasuries, or similarly low-risk investment, and develop investment options that address risk-sharing and smoothing of market losses and gains. Participant fees would be low,” lawmakers promise. In addition, the state board and its relevant contractors would have a fiduciary duty to the participants of the program.
The law applies to employers with five or more employees who do not offer an employer-sponsored retirement plan. These employers will be required to either establish their own in-house plan, or provide their employees with payroll deferral access to California’s Secure Choice Retirement Program. According to lawmakers, mandated employers themselves would be exempt from Employee Retirement Income Security Act (ERISA) liability.
NEXT: Context and analysis
Asked to comment broadly about the likely impact of the Secure Choice program and other similar examples of legislation being implemented across the U.S., ERISA attorney David Levine, principal with Groom Law Group in Washington, D.C., says it could all be pretty significant from the perspective of plan sponsors and service providers alike—especially those working in the micro-plan market.
“There are a obviously a few ways to think about these emerging programs, positive and negative,” Levine explains. “We can all agree on a few things: Will it push more people into saving? Yes. Could some very small employers have a change of heart about their commitment to offering a defined contribution plan, and could we therefore see small plan sponsors decide to quit their own plans? Yes. Would this impact your business as an adviser to small employers? Yes.”
Levine says he expects the impact will be mild but potentially negative for micro-specialists, “but at this point it’s probably better to just accept that these programs are becoming a reality. You may have to rethink certain aspects of your business touching on the small employer market.”
“If you’re an adviser who is opposed to it, you can push back, certainly,” Levine adds. “But I think these things are clearly moving forward and they clearly have the support of lawmakers and the public.”
In that sense programs like Secure Choice and all the others are also absolutely an opportunity for advisers, he adds.
“I think it’s especially encouraging what is going on in the ‘open multiple employer plan’ world,” Levine advises. “I’m imagining a future where an adviser could come into a group of small employers and pitch the idea of rolling up a bunch of small accounts together into a real defined contribution plan. Sure that will be more revenue for the adviser, but it’s also going to bring a higher quality option to the client, so it shouldn't be a fiduciary issue. We all know IRAs have lower account limits and the owners of the business can be very receptive to the tax incentives associated with qualified DC plans.”
NEXT: A mix of other responses
In anticipation of the law’s adoption, the Investment Company Institute (ICI) penned an open letter to Governor Brown, urging the legislature to “carefully examine the costs and risks of legislation to implement the California Secure Choice Retirement Savings Program.” ICI’s letter suggests in pretty stark terms that the absolute financial cost of the program as designed, for taxpayers and businesses in California, is essentially unknown and potentially subject to be much greater than anticipated.
“Though ICI supports efforts to improve retirement savings … the California Secure Choice Program depends on many factors, including the opt-out and contribution rates of enrolled workers; legal and compliance costs relating to various federal laws; administrative costs in setting up and maintaining the program; and potentially significant costs that may arise later if market returns generated by the program’s investments are insufficient to cover promised benefits to participating workers,” ICI warns. “California taxpayers or Secure Choice Program participants—or most likely both—will find themselves bearing unanticipated costs if the program advances.”
Others are clearly more optimistic. Back in August when the Department of Labor published its own final rulemaking about state-based IRA options, the Los Angeles Times editorial board argued that Secure Choice could be a “potential customer, not a would-be rival” for advisers and service providers. “Rather than managing retirement investments itself, the board will put that work out for bid by mutual fund companies and other investment firms that already have that expertise,” the paper argued.
For its part, the California Secure Choice management board lists an impressive group of supporters on its website: AARP; the Asian Business Association; the California Black Chamber of Commerce; the California Asset Building Coalition; California Association of Nonprofits; Church IMPACT; Los Angeles Latino Chamber of Commerce; National Council of La Raza; SEIU California; Small Business Majority; and Young Invincibles.
“Seventy-three percent of survey respondents think offering such a program would give their business a competitive edge,” the management board concludes. “The state would have no liability for the program funding or performance. By enabling participants to save for retirement, they may be less reliant on taxpayer funded public services when they reach retirement age.”