An open letter from the Investment Company Institute (ICI) to California Governor Jerry Brown warns the governor and legislature to “carefully examine the costs and risks of legislation to implement the California Secure Choice Retirement Savings Program and stop it before it is implemented.”

ICI’s letter suggests in pretty stark terms that the 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. As ICI explains, the program “would automatically enroll private-sector workers who don’t have employer-sponsored retirement plans in a state-run plan funded through payroll deductions.”

“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.”

ICI observes that legislation authorizing the program rightly seeks to limit the state’s liability, but it argues future state policymakers “are nevertheless likely to feel an obligation to cover any shortfalls or excessive expenses that the program incurs.”

“Potential amendments to the legislation appear unlikely to affect ICI’s economic analysis of the program’s risks and costs,” the group explains. “Secure Choice—as currently structured—does not present a viable means of expanding meaningful retirement savings for private-sector workers in California and carries tremendous risks that could put taxpayers on the hook for a bailout.”

ICI President and CEO Paul Schott Stevens suggests the analysis used to advance the underlying Secure Choice legislation “paints an overly optimistic picture of this program’s success and dangerously understates the economic risks to the state of California.” Explaining the ICI’s interest in the matter, Stevens observes about half of defined contribution plan and individual retirement account (IRA) assets are invested in mutual funds, “which makes the mutual fund industry especially attuned to the needs of retirement savers.”

NEXT: ICI’s harsh analysis 

The ICI analysis cites in particular the risk that Employee Retirement Income Security Act (ERISA) lawsuits could likely affect the operation and cost of the program; and “whether the investment structures contemplated by the Secure Choice Program would result in registration obligations, and costly compliance, reporting and disclosure obligations, under federal securities laws.”

The program will incur significant start-up and ongoing administrative costs, many of which have been ignored or not fully recognized, ICI claims. And while the legislature is seeking to cap administrative costs at 1% of program funds, “if costs exceed that cap, the gap will need to be closed—either by raising fees on the very workers the program is intended to benefit, or through a bailout from California taxpayers.”

ICI goes on to cite the “economic risks California may face if certain investment structures are chosen. For instance, the ‘pooled IRA with reserve fund’ under consideration would provide a ‘soft guarantee’ to reduce but not prevent losses for enrollees. This ‘soft guarantee’ creates the very real risk that a sustained negative market environment will exhaust any ‘surplus’ earnings withheld from participants. In such circumstances, the state will be forced to either fund distributions from new contributions, reduce participants’ account balances to cover investment losses, or seek a bailout from California taxpayers to cover the funding deficit created by the ‘soft guarantee,’” ICI warned.

Each of these issues, among others, raises significant questions about the viability of the program, ICI claims, and “requires further examination before Secure Choice advances.”

“Federal requirements provide important protections, which private-sector retirement savers have enjoyed for more than four decades,” ICI’s letter concludes. “However, these protections impose compliance costs, and it is unclear whether the state's analysis includes these costs, which all private-sector providers must bear. Either the state anticipates operating the program without these important consumer protections, or it has failed to consider significant compliance costs that may affect the viability of the program.”

The newest comment letter from ICI is here, and a previous version with additional analysis is here.