Today, California Gov. Jerry Brown signed the Secure Choice Retirement Savings Act into law.
The bill intends to extend access to retirement savings accounts to about 6.8 million private sector workers in the state that do not have access to a savings vehicle through the workplace.
The law mandates that California employers with five or more workers sponsor a retirement plan. Employers that don’t have a plan and opt not to sponsor a plan will be required to automatically enroll employees into the state-sponsored retirement savings program.
For the first three years of the program, all assets will be invested in U.S. Treasuries, or myRA accounts, the savings program established by the U.S. Department of Treasury that also invests savings in bonds issued by the federal government.
Workers will be able to opt out of the program, a provision required of the safe harbor on state-sponsored retirement plans recently issued by the Department of Labor.
Under the new law, enrollees will have 3 percent of their annual salary deferred to individual accounts administered by the state. Deferrals may automatically escalate up to an 8 percent threshold. Beyond the ability to opt out, workers will have the option to adjust deferral rates.
According to the California State Treasurer’s website, the law is slated for implementation on Jan. 1, 2017. But recent media reports suggest more time will be needed to implement the program, and a 2018 launch is more likely.
In the first year, the costs to implement and administer the program will be appropriated from California’s general budget fund.
The law requires that the initial taxpayer funds needed to launch the program to be repaid from investment accruals. After the first year, the law prohibits the program’s administration costs from exceeding 1 percent of the total fund’s assets.
The program will be administered by an investment board, comprised of nine members and headed by the state treasurer, and will include several members appointed by the governor.
How the program is to work
Mandatory enrollment will be phased in relative to the size of eligible employers: Those with 100 or more employees will have 12 months from the time of the program’s launch to enroll workers; those with 50 to 100 employees will have two years; and all other eligible employers will have three years to enroll workers.
The investment board will have discretion to adjust the minimum deferral between 2 and 5 percent of salary, depending on the length of time an individual enrollee has participated in the program. The law prohibits the statefrom guaranteeing the assets in the fund.
Over 75 percent of low and middle income retirees in California rely exclusively on Social Security to fund retirement, according to a primer issued by California’s treasurer. Nearly half of California’s workforce is on track to retire with incomes 200 percent below the federal poverty level.
The law has wide support from the AARP and trade unions.
“Secure Choice will help millions of California workers improve their financial security by offering them a low-risk, low-cost and portable savings plan. California’s innovative approach is being watched nationwide as a model for improving retirement security for millions of Americans,” said Nancy McPherson, California state director for AARP, in a statement.
Throughout the legislative process, the Investment Company Institute, a trade organization that advocates on behalf of the mutual fund industry, has issued extensive criticisms of the program.
This August, Investment Company Institute CEO Paul Schott Stevens wrote Brown, saying that the program’s success relies on an overly optimistic assessment of the program’s likely adoption rate among workers. Stevens also said the program assumes higher contribution rates than low-income participants will be able to defer.
“California taxpayers or program participants — most likely both — will likely find themselves bearing unanticipated costs as a result of the program,” Stevens wrote in the letter to Brown.
Though the law prohibits the program’s assets from being backed by taxpayers, Stevens said, “there exists a very real possibility that California taxpayers ultimately will need to bail out the program.”
The Investment Company Institute says that the program and investment board will be required to register with the Securities and Exchange Commission, and be required to comply with the Investor Advisor Act of 1940. That would make the program more expensive to operate than the law’s feasibility study assumes, the trade group says.