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Last week, CalSavers, California's mandatory IRA savings program for businesses that do not offer a private sector retirement plan, scored a significant court victory. A district court ruled that the program does not constitute an employer-sponsored retirement plan, meaning that it is not preempted by the Employee Retirement Income Security Act–meaning that it can continue to operate. The plaintiffs in the case plan to appeal.
The legal victory will resonate outside California, says Katie Selenski, CalSavers' executive director.
"One really positive affect of this court decision is it gives other states more confidence that they can proceed boldly without having to worry about legal challenges," said Selenski.
By some counts, as many as 20 states are at some stage of following in the footsteps of California, Oregon, and Illinois in launching a state-sponsored workplace savings option for private sector workers that do not have access to a 401(k) plan.
California opened its program last year. Its mandates begin this year, on June 30, when employers with 100 or more workers that don't sponsor a plan will have to enroll workers in CalSavers. By 2022, all employers with 5 or more workers will be required to do so.
To date, the enrollment numbers have been promising, thinks Selenski. There are 1,618 registered employers, and 5,610 funded accounts. Several more thousand are enrolled.
Perhaps most importantly, opt-out rates have been in line with expectations. Under CalSavers, participants are automatically enrolled with the option to opt-out.
The opt-out rate so far is 32.6 percent. That's high if you compare it to automatic enrollment in 401(k) plans. But CalSavers targets a much different saver—workers that haven't previously saved for retirement.
The median income of participants is estimated to be $25,000, said Selenski. Their default rate is set at 5 percent. Employer can't contribute, so there is no employer match to incentivize participation. That so many are staying in the plan is testament to their discipline, and desire for a workplace savings option.
"This is people—often lower wage earners—choosing to save 5 percent of their earnings without the financial incentive that most savers in 401(k) plans have. We are proud of the opt-out rate," said Selenski.
Fortuitous protection in the face of the coronavirus sell off
On the one hand, the new retirement savers in CalSavers are in the midst of a crude introduction to saving in retirement plans, as the securities markets have shed trillions in value in the face of the coronavirus pandemic.
So far, they are not showing symptoms of panic, Selenski said. A market volatility tracking code was added to CalSavers call center a couple of weeks ago. As of this week, there have been no calls related to market volatility.
"That's not to say we won't get any. If we do, we're ready to field those questions," she said.
On the other hand, the new participants in CalSavers have a couple of built-in protections. The first $1,000 of savings is defaulted into a money market fund. So far, 86 percent of all savers are in the capital preservation fund. And savings are invested in a Roth IRA, meaning participants can access their contributions in the event of an emergency without tax exposure or penalties.
"Our savers tend to be lower-income hourly wage earners. We expect many of them to be hit hard by the economic impact of coronavirus. We hope they won't experience financial emergencies, but if they do they can access their contributions tax and penalty free," noted Selenski.
She said there are no plans to lower the default rate of 5 percent—participants can do that on their own. Those that do experience reduced work hours will see a commensurate reduction in their contributions.
Getting workers access to a retirement plan
Critics of state-sponsored retirement plan have argued, in part, that the effort to extend retirement plans to workers without access could have a deleterious impact on the private-sector provider market. Existing sponsors of plans will be incentivized to drop their plans and dump workers into state IRAs, goes one argument. Another implies a more Machiavellian intention of states trying to up-end the private sector retirement plan market.
As she travels her region and the country addressing industry and other state policymakers, Selenski admits to sounding like a "broken record."
"We could not be more sincere," she says. "We measure our success by the new access savers have to retirement plans. If that is through CalSavers, or through new 401(k) plans, it does not matter how. If the result of our mandate is that the retirement industry creates better, cheaper plans for small businesses, and those businesses go with those plans and not ours, we would count that as a huge success."
She's begun to hear smatterings of anecdotal evidence among plan advisors that that is happening. CalSavers is working with researchers to develop a way to formally track any bumps in plan formation that may come with wider implementation of state-run plans.
For the time being, Selenski, who says she has the best job in the world, will continue to be laser-focused on educating employers and leading CalSavers outreach strategy.
"We're here to serve historically underserved communities of workers," she said. "We're here to make history."
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
