The California Secure Choice Retirement Savings Program was approved by Governor Jerry Brown back in 2012, but it has yet to receive the blessing of some of the major defined contribution (DC) plan industry groups operating in the state.
Among the opposition stands the Investment Company Institute (ICI), which represents the interests of nearly 40 member companies located in California, with about 16,000 employees in the state and $3.5 trillion in assets under management. ICI says these California-based companies, as well as mutual fund companies based outside of California, provide affordable and highly performing investments and other services to large numbers of retirement plans and individual retirement savers in California.
It’s not hard to predict where the ICI’s opposition to the Secure Choice Program is rooted, given its national footprint and the desire of its members to remain key players in the delivery of affordable and effective retirement plans to the large and productive private U.S. workforce. While ICI says it wholeheartedly supports the goal of the Secure Choice Program—i.e., getting more people saving for and engaged in their own retirement—it feels the new program will only create more complexity for providers and consumers while doing little to help peoples’ actual financial health. People need more money to save and more education about how to save, ICI says, not another type of account.
Beyond the concerns about an increasing lack of consistency among the states’ individual approaches to public DC programs for private sector workers, ICI members are “concerned that the program participants or California taxpayers—or most likely both—will find themselves bearing unanticipated costs as a result of the program.” They suggest program raises important and open legal questions as well, which could lead to litigation and other unforeseen hurdles.
“In particular, [the law that established the Secure Choice Program] requires that prior to implementation, the board must find that the program accounts will qualify for the favorable federal income tax treatment accorded to IRAs under the Internal Revenue Code, and that the program is not an employee benefit plan under ERISA,” the ICI explains. “As we all know, the ERISA status of state-based programs is the subject of a pending rulemaking project at the U.S. Department of Labor.”
The ICI further cites the fiduciary rulemaking as another reason to slow the implementation of the Secure Choice Program, until it’s clearer how individual retirement accounts (IRAs) and any other accounts or products touching workplace retirement accounts are to be treated from the fiduciary perspective.
NEXT: California confident in its plan
For its part, the state says it is confident that it has a good understanding of how the program will be rolled out and how much it will cost whom. To explain as much, the state published an extensive feasibility study submitted to the California Secure Choice Retirement Savings Investment Board (SCIB) by Overture Financial LLC, clocking in at a cool 524 pages.
ICI says the detailed report, while including copious amounts of statistics and data, still is far from comprehensive. The report’s writers, unsurprisingly, disagree, noting the final report “represents the culmination of many months of collaboration between Overture Financial and its sub-contractors, the board, California Secure Choice personnel and contractors, stakeholders in the public and private sectors, service providers, employers and employer associations, worker organizations, and community groups.”
According to the report, the Secure Choice Program could immediately benefit about 6.8 million workers who are potentially eligible. According to Overture’s analysis, likely participation rates are around 70% to 90%, based on polling data. This is “sufficiently high to enable the program to achieve broad coverage well above the minimum threshold for financial sustainability,” they argue.
Further, the report cites polling data to the effect that “eligible participants in California are equally comfortable with a 3% or 5% contribution rate.” Setting a 5% auto-enrollment figure will be a strong start towards retirement readiness for lower- and middle-income workers, the report argues, especially considering the vast majority of likely participants surveyed are also comfortable with auto-escalation in 1% increments up to 10%.
“To start, the program should offer a default investment option consisting of a diversified portfolio with long-term growth potential and the choice to opt into a low-risk investment,” the report recommends. “Given its inherent portability, the program should have a lower incidence of rollovers and cash-outs than employer-sponsored 401(k) plans, which often force workers with low balances to close their accounts. At the same time, pre-retirement withdrawals are likely to be higher for the program given eligible workers’ income profile.“
Overture concludes that the program launch “should include a concerted public education campaign focused on workers and small businesses.”
The ICI contends this is all overly optimistic, and further warns that it is “seriously concerned that initiatives like that under consideration in California will ultimately lead to the creation of a fragmented, state-by-state system of retirement savings for private sector workers. A patchwork of state-run programs, each with its own unique rules, has the potential to harm the voluntary system for retirement savings that is helping millions of American private-sector workers achieve retirement security.”