In California, nearly everyone will now have one of these...
The most progressive step forward for retirement security in many years occurred last week not in Washington, but in Sacramento, where Gov. Jerry Brown signed the California Secure Choice Retirement Savings Program (SB 1234) into law. After years of coming close – and tireless advocacy by State Senator Kevin DeLeon the Asset Building Program’s California team, and other advocates – the Golden State is poised to pave the way for the sort of“Universal 401(k)” that we have advocated for over a decade. And if President Obama is re-elected, the California plan could help push the Administration to make its similar Automatic IRA proposal both more robust and a higher priority.
The Secure Choice Trust will facilitate retirement saving by 6.3 million Californians, mostly lower and middle-income workers, who have no access to a retirement plan at work. The committee report notes that 62% of private sector workers in California do not participate in employer-sponsored plans – a rate that jumps to 84% of people working for firms employing 25 or fewer workers. The plan addresses the reality that Social Security replaces less than 40% of wages for the typical worker. The bigger retirement saving crisis is that the majority of American adults do not participate in any retirement saving plan—whether pension or 401(k) or Individual Retirement Account (IRA).
The California plan requires all businesses with five or more employees that do not offer a retirement saving plan to enroll its workers and forward employee contributions by automatic payroll deduction to the Secure Choice Trust. Workers will initially make a default contribution equal to 3 percent of pay,although an individual could choose to save more – or to opt out and not participate at all. Employers are not required to contribute although, unlike the Auto IRA proposal endorsed by President Obama, they can make voluntary contributions.
Combining automatic enrollment with pooled investment and career-long portability is clearly a policy innovation with momentum. On October 1 the biggest employers in the United Kingdom began enrolling their workers in a very similar program called the National Employment Savings Trust (Nest). After a phase-in period nearly all workers in the UK will be automatically enrolled with contribution levels rising gradually to 4% from the employee, 3% from their employer and a 1% tax credit – for a total annual contribution of 8% of pay.
Other key features of the California plan include:
• Hybrid Accounts: Benefits are based on individual account balances, not a defined benefit pension formula, but with the risk-reducing features of pooled investment management and guaranteed monthly benefit payments.
• Portability: Unlike 401(k)s, workers remain enrolled and seamlessly eligible as they move from job to job, and without the 1-year waiting period that is typical for new hires lucky enough to receive any pension benefit.
• Guaranteed Return: The law gives the Secure Trust Investment Board discretion to use a reserve fund to ensure no participant actually loses money and/or to smooth returns for workers who retire in the wake of bull or bear market.
• Pooled, Professional Investment: Like the Federal Thrift Savings Plan, the Board mustensure prudent but not overly conservative investments, with no more than 50% in stocks.
• Mandatory Annuitization: Like Social Security, account balances will be converted into guaranteed monthly benefit payments for life to avoid the risk of retirees outliving their assets.
• Self-Financing:Taxpayers would have no liability for benefits, administrative costs would be charged to participants, and even the cost of the required feasibility study must be contributed by private parties.
One stumbling block to implementation is the bill’s requirement that the Board “initially conduct a market analysis,” financed by the private sector, to determine if the Secure Choice program will be financially sustainable. Projections of participation rates, fee structures, contribution levels and rates of account closures and rollovers are all factors. The findings must be presented to the relevant legislative committee chairs, opening the possibility that the California plan could be canceled or modified.
Regardless of how or when California’s plan is fully implemented, if President Obama is re-elected he will come under pressure from both activists and senior Democrats in Congress to prioritize a considerably more robust version of the Automatic IRA proposal he endorsed and then shelved in deference to the health reform and partisan budget battles. As we outlined in Facing Up to America’s Retirement Saving Deficit, five additional features are needed to dramatically strengthen the Automatic IRA concept. Several these improvements are part of the California plan: seamless eligibility and portability, pooled investment, annuitization and permitting employer contributions.
The lead Democrats on both the Senate and House Labor Committees – Sen. Tom Harkin and Rep. George Miller – have expressed support for a more universal saving system that will make a more robust difference for retirement security. In July Sen. Harkin released his plan proposing universal access to a new type of retirement plan – Universal, Secure, and Adaptable (“USA”) Retirement Funds – that is very similar to California’s Secure Choice approach.
Let’s hope that when the next Congress overhauls tax policy, it won’t neglect the opportunity to turn our upside-down subsidy system for retirement saving into a Secure Choice for the majority of middle- and low-income workers with no access to a payroll-deduction savings plan at work.