New state-run IRA for private sector opens July 1

A new state workplace retirement savings program, CalSavers, will open to an estimated 250,00 to 300,000 employers on July 1 — offering an automatic IRA payroll deduction for the 7.5 million California workers with no retirement plan on the job.

The massive program, expected to handle billions in savings, is voluntary for employees. If they don’t opt out in 30 days, they are automatically enrolled. Once in the plan, they can opt out at any time, and then opt back in if they choose.

For businesses with five or more employees, the program is mandatory. They must offer employees CalSavers, or a qualified retirement plan chosen by the employer, to avoid a penalty for repeated non-compliance of $750 per employee.

CalSavers opens July 1 to all eligible employers and to the self-employed on Sept 1. Compliance deadlines begin for businesses with over 100 employees June 30, 2020; over 50 employees June 30, 2021, and five or more employees June 30, 2022.

The CalSavers goal is to help the nearly half of all California workers, with little beyond Social Security, who are projected to retire into hardship. Their average annual income is $35,000. Two-thirds work for businesses with less than 100 employees.

“Workers with a payroll deduction savings option are 15 times more likely to be on a path to retirement security, and 20 times more likely when it’s automatic enrollment,” says CalSavers, citing AARP.

CalSavers launches after a difficult 11-year journey. Finance groups objected to government competition and overreach. Labor groups wanted protection against investment losses. Conservatives and taxpayer groups feared more state retirement debt.

Former state Sen. Kevin de Leon, D-Los Angeles, whose initial legislation failed in 2008 and 2009, obtained legislation for a feasibility and marketing study in 2012, and the final authorizing legislation in 2016.

During the 2008 presidential campaign, Barack Obama and John McCain endorsed an automatic IRA for individual tax-deferred retirement savings, a proposal made in 2006 by J. Mark Iwry of the Brookings Institution and David C. John of the Heritage Foundation.

Former President Obama’s repeated budget proposals for an automatic IRA failed in Congress. A National Conference on Public Employee Retirement Systems paper in 2011 proposed a model automatic IRA for states to adopt and gave it a name, Secure Choice.

“The NCPERS plan reflected the recognition by public employees that the quality of their own retirement coverage could be at risk if their counterparts in the private sector lack access to a retirement system,” a Center for Retirement Research at Boston College report said in 2016.

CalSavers was formerly known as Secure Choice. Two states have already launched automatic IRA programs, OregonSaves and Illinois Secure Choice, and three other states are developing automatic IRAs, New Jersey, Maryland, and Connecticut.

California joined other states in successfully urging the Obama administration to provide a “safe harbor” labor regulation exempting automatic IRAs from a federal law for private-sector pensions, the Employee Retirement Income Security Act (ERISA).

After President Trump took office in 2017, the Republican-controlled Congress, through the rarely used Congressional Review Act, passed fast-track legislation signed by the new president that repealed the 2016 safe harbor regulation.

The authorizing legislation for CalSavers says the program can’t be covered by ERISA, which has burdensome regulations and could expose employers to liability. CalSavers believes it’s exempt from ERISA without the added security of a safe harbor.

Last March, a federal judge ruled in a Howard Jarvis Taxpayers Association suit that CalSavers is not preempted by ERISA. U.S. District Judge Morrison England Jr. dismissed the Jarvis claim with “one final leave to amend” due to the importance of the issue.

“We are very confident we are on strong legal ground,” Katie Selenski, CalSavers executive director, said last week.

CalSavers pilot participation snapshot as of May 29, 2019

CalSavers emerged from the legislative gauntlet with an unusual limit for a new state program: no cost to taxpayers. It’s roughly similar to two smaller savings programs also run out of the state treasurer’s office: ScholarShare for college and CalABLE for disabilities.

Half of the $1 million donated for a CalSavers feasibility study came from the Laura and John Arnold Foundation, vilified by some for pushing pension reform. Two public employee unions contributed $100,000 each, state SEIU and the California Teachers Association.

CalSavers, operating with a state startup loan that will be repaid by saver fees, has spent about $3.3 million so far. The program is expected to save taxpayers money in the long run by reducing the need for public assistance to impoverished elders.

The CalSavers staff remains small under the authorizing legislation requiring the use of private-sector contractors. Ascensus is the administrator, handling record keeping, a customer service call center, and the website used by savers to monitor and change their accounts.

State Street runs four investment funds: money market, target date based on retirement age, bonds, and global equity. Newton runs an ESG fund screened for environmental, social and corporate governance factors.

AKF is the general consultant, Meketa the investment consultant, and K&L Gates the legal and regulatory advisor. The nine-member CalSavers board includes the state treasurer, controller, finance director, four gubernatorial appointees, and two legislative appoinitees.

CalSavers formed a number of working groups with employers and employees during the design of the program. Experience was shared by the Oregon plan, launched two years ago, and the Illinois plan started last year. Both are administered by Ascensus.

Easing problems small businesses have faced in offering retirement plans, CalSavers has no employer fees, cuts the burden of selecting and administering a plan, and the employer is not a sponsor with fiduciary liability.

Employers register with CalSavers, send an employee roster, enable a payroll deduction, and then provides roster updates. Employers do not contribute to employee savings accounts, answer questions about the program, or encourage or discourage participation.

For employees, the preselected or default CalSavers payroll deduction is 5 percent of pay, automatically increasing 1 percent a year to 8 percent of pay. But savers can change their payroll deduction rate at any time.

A Roth IRA is standard, allowing withdrawals without penalties or taxes. A traditional IRA option will be available by the end of the year. If the employee moves to another job, the savings can be transferred or left with CalSavers.

If savers don’t choose their funds, CalSavers puts the first $1,000 into the money market fund, with little risk of investment loss, and contributions after that into a target date fund based on the age of the saver.

The fee CalSavers charges savers, which is how the program is sustained, are expected at launch to total 0.825 to 0.95 percent (82.5 cents to 95 cents for every $100 per year) and then drop as the program grows to among the lowest in the industry.

Most of the total charge is a program administration fee for day-to-day operations and repaying the startup loan with interest. The rest is a fee for managing investments, ranging from 0.025 percent to 0.15 percent depending on the investment option chosen by the saver.

During a pilot that received its first contributions Jan. 3, CalSavers worked with 60 employers to test the program. Most of the results so far (see chart) are from the first wave of 30 employers and generally meet expectations, including the opt-out rate of 22 percent.

One of the challenges that CalSavers faces now is moving from the close attention given employers during the pilot phase to a more automated routine as the program grows, Selenski, the executive director, told the CalSTRS board last month.

Another challenge is the lack of a budget for advertising and marketing as the program launches, Selenski said. Her presentation to the CalSTRS board was part of a cost-cutting grassroots campaign to spread awareness of the program and urge others to do the same.

“Every dollar we spend out of that loan is a dollar that is coming out of the pockets of our savers,” Selenski said.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

Will Federal Law Kill California’s Secure Choice Retirement Scheme?


kevin de leon 2An unprecedented state law meant to create 401(k)-style retirement accounts for millions of private-sector workers in California now faces a daunting obstacle to ever being implemented: one of the most powerful federal laws on the books.

Under the state law establishing the California Secure Choice Retirement Savings Program, after it is phased in, all companies with five or more workers which do not have retirement benefits eventually would have to withhold 3 percent of worker pay and send it to the state government, with the funds to be invested in safe financial instruments such as U.S. treasuries. Workers could opt out.

The proposal was championed by state Senate President Kevin de León (pictured), D-Los Angeles, with strong support from state Treasurer John Chiang. They depicted it as crucial to helping 7 million Californians working in jobs without retirement benefits to prepare for retirement.

But the Republican-controlled Congress recently passed, and President Trump subsequently signed, a law overturning an orderissued last August by the Obama administration’s Department of Labor that exempted Secure Choice-type programs from the Employee Retirement Income Security Act (ERISA), a landmark 1974 law that established strict standards for retirement plans and their management. This erased legal concerns raised by pension lawyers aware of ERISA’s intricacies.

Yet at a news conference last week, de León and Chiang downplayed the significance of the lost ERISA exemption. They said they had only sought the federal action in response to concerns raised by the California Chamber of Commerce and the California Manufacturers and Technology Association – not because of a concern that Secure Choice would be subject to ERISA.

That’s not the conclusion one would be likely to gather after reading the language of Senate Bill 1234, the de León bill establishing Secure Choice that was signed by Gov. Jerry Brown in September. It makes specific reference to the ERISA exemption: “The United States Department of Labor has finalized a regulation setting forth a safe harbor for savings arrangements established by states for nongovernmental employees for the purposes of the federal Employee Retirement Income Security Act.”

And it says the Secure Choice governing board “shall not implement the program … if it is determined that the program is an employee benefit plan under the federal Employee Retirement Income Security Act” – which it now appears to be.

ERISA expert notes scope of landmark 1974 law

However, de León and Chiang cited a 2016 opinion from the K&L Gates law firm that sees no ERISA compliance problem. But the opinion is based on an earlier version of the bill – not the measure that passed and seemed built on the assumption that Secure Choice was only legal with the ERISA exemption.

In a March analysis released as the bill to overturn the exemption was advancing through Congress, the National Public Pension Coalition’s program manager, Tyler Bond, suggested courts might rescue Secure Choice-type laws by deciding ERISA doesn’t apply. But Bond’s background is as a communications specialist, not the law.

Michael A. McKuin, a Palm Desert lawyer who specializes in ERISA, notes on his website the long history of courts broadly interpreting ERISA’s scope because of the law’s sweeping language: “The provisions of … this chapter shall supersede any and all state laws insofar as they may now or hereafter relate to any employee benefit plan.”

McKuin writes: “In determining whether a plan is governed by ERISA, courts have generally followed the approach of the Eleventh Circuit in Donovan v. Dillingham, 688 F.2d 1367 (11th Cir. 1982) (en banc). Under the Dillingham test, an ERISA plan exists if a reasonable person can ascertain: (1) the intended benefits, (2) intended beneficiaries, (3) the source of financing, and (4) the procedures for receiving benefits. … The purported plan need not be formal or written to qualify as an ERISA benefit plan, but rather, the court must look to the ‘surrounding circumstances’ to see if the four factors have been met.”

“As a practical matter, it does not take much to satisfy the test and Courts will generally find the existence of an ERISA plan even where no such plan is wanted by anyone,” McKuin writes – unless the plan has the “safe harbor” specifically mentioned in SB 1234’s ballot language.

This piece was originally published by CalWatchdog.com

California Advances Private Sector Retirement Plan Without Feds


As reported by KQED:

California officials vowed to move ahead with a retirement savings program for the state’s private sector workers, a day after losing the federal government’s support for the initiative.

Senate President Pro Tem Kevin de Leon and State Treasurer John Chiang said [last week] that the state will still enact the Secure Choice program, authorized last year, that will create retirement accounts for nearly 6.8 million Californians. De Leon criticized opponents of the plan as representing the interests of large banks and brokerage firms.

“California will move forward with Secure Choice with or without Washington’s blessing,” said de Leon, who authored the legislation that created the program. “We will put the future and well-being of our workers over Wall Street greed any day of the week.”

California’s program would automatically enroll private sector workers into a state-run retirement program. Unless they opted out, employees would contribute 3 percent of their earnings and a state board would oversee and invest the funds. …

Click here to read the full article

California’s “Secure Choice” program is neither secure nor a choice


retirement_road_signCalifornia’s “Secure Choice” program sounds harmless enough: A voluntary program — at least for now — that would enroll private sector employees who currently don’t have a retirement plan into a state-run retirement savings account.

When the initial program was announced in 2012 with authorizing legislation, taxpayers were skeptical. Now that the program is even closer to fruition, there is greater reason to be concerned. The good news, however, is that the U.S. Congress is now threatening to pull the plug on this foolish endeavor.

The first question is why is this program even needed? While many public employees don’t pay into Social Security (most receive generous public retirement benefits instead) workers in the private sector do receive Social Security. One might complain that Social Security benefits are inadequate but, because the program is backed by the federal government (which has the power to print money) the benefits promised are almost certain to be forthcoming. Not only that, under federal law, there are many programs to assist private-sector workers whose employers don’t offer 401(k) or other employer-based plans. These include individual retirement accounts, both traditional and Roth IRAs. For workers without an employer retirement plan, there are generous limits on how much can be saved tax deferred.

To read the entire column, please click here.

Who Funds CA’s Public Pension Systems?


As reported by the San Diego Union-Tribune:

The debate over public employee pensions often centers on funding — who’s paying the tab.

Taxpayer groups point to large public contributions to retirement funds. Public employees and pensioners point to their own contributions — and investment earnings by the pension fund itself — as significant contributors.

New data from the U.S. Census bureau sheds light on the balance among those three sources, when it comes to funding pensions.

The top contributor to state and local pensions in 2015 in California was investment earnings, at $28.2 billion or 45 percent of incoming revenue for pension systems.

Next was government contributions, generally borne by taxpayers, at $24.6 billion or 40 percent of funding. Public employee contributions totaled $9.4 billion, or 15 percent of revenue. …

Click here to read the full article

Should State Provide Retirement Fund for All Californians?

retirement_road_signState policy makers on Monday inched closer to a state-run retirement system for workers who don’t have access to employer-run accounts.

Secure Choice, if implemented, would require employers of five or more people to automatically enroll employees into portable retirement accounts, with an opt-out clause for the individual.

While everyone has the ability to go check-in-hand to invest in a retirement account at any time, proponents of the measure point to the fact that many are not. The theory behind the bill is that the approximately 7 million people in the state who don’t have employer-based retirement accounts need to be nudged into planning for the future.

The program would be administered by a nine-member California Secure Choice Retirement Savings Investment Board, which is chaired by the state treasurer.

On Monday, the board accepted recommendations based on a market analysis and feasibility study prepared by an outside vendor. The study was paid for with $1 million in private funds raised by Senate pro Tem Kevin de León of Los Angeles, the bill’s sponsor.

The study’s recommendations will be added to an amended version of the 2012 bill, which is to be heard in the Senate Public Employment and Retirement Committee by April 22.

Details

The plan is for the state to provide the opportunity for saving. There is no state contribution to the fund, so proponents say there is little to no risk to the state.

The state would incur administrative costs, but those would be covered by participant fees, according to Grant Boykin, deputy treasurer for retirement security and health care.

Businesses will not be required to offer financial advice about the plans, said Boykin. Instead, they will pass on information determined by the board and then set up payroll deductions.

“Education will be hugely important, but that will fall on the board,” Boykin said.

Behavioral economists contacted by de León advised that people are 15 times more likely to save once the account has been opened than if left to open an account on their own, according to Boykin.

De León conceded that there was an element of risk to the employees when investing in retirement funds, but he said that the types of investments would be relatively low-risk.

Opposition

When the initial measure passed in 2012, it was over the opposition of groups like Howard Jarvis Taxpayers Association, which opposed on the grounds that the private sector was already performing this service, and business groups, like the California Chamber of Commerce, which opposed largely on concerns of the impact on employers.

Key findings of the study

  • “About 6.8 million workers are potentially eligible for the California Secure Choice Retirement Savings Program.”
  • “Likely participation rates (70-90 percent) are sufficiently high to enable the program to achieve broad coverage well above the minimum threshold for financial sustainability.”
  • “Eligible participants in California are equally comfortable with a 3 percent or 5 percent contribution rate. The vast majority of likely participants are also comfortable with auto-escalation in 1 percent increments up to 10 percent.”
  • “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.”

Originally published by CalWatchdog.com

Government Hypocrisy: “Save More”

Photo courtesy of kenteegardin, flickr

Photo courtesy of kenteegardin, flickr

American government is so ubiquitous it even offers advice about New Year’s resolutions. However, its guidance to citizens mainly illustrates ideas government violates. Consider one example from the About USA.gov site: “Save more.”

That is not a very controversial resolution for an uncertain world. But the massive and still growing government debt and its far larger unfunded liabilities makes it the largest violator of its own resolution. Talk about “do as I say, not as I do.” Further, the main reason people save too little is that government does so much that discourages saving and investment, making the Hippocratic oath –“First, do no harm” — a better means to increase savings.

One huge illustration is Social Security. People have been led to substitute its “contributions” and retirement benefits for funds they would have saved to finance their “golden years.” Its promises also dramatically exceed what funds will be available, making people anticipate richer retirements than they will actually have, reducing savings more. Those who save enough to provide well for retirement also face income taxes on most of their Social Security benefits as well.

Social Security exacerbates the adverse effects of budget deficits, which divert funds that would have added investment into government spending.

Taxes on capital reduce the after-tax return on saving and investment, also reducing saving. These include property taxes that, while relatively small percentages of the capital value, represent sizable fractions of annual income generated. Then state and federal (and sometimes local) corporate taxes take further bites from after-tax returns. The implicit “tax” imposed by regulatory burdens must also be borne before earnings can reach investors.

Personal income taxes at up to three levels of government reduce saving further. Investment income left after other taxes is taxed again if paid out as dividends.  Earnings from saving and investment can also trigger additional tax burdens by triggering phase-outs of income tax deductions and exemptions.

If investment earnings are retained and reinvested, increasing asset values, they are taxed as capital gains. And even increases in asset values from inflation are taxed as real increases in wealth.

Medicare, whose unfunded liabilities are far greater than Social Security’s, reduces incentives to save for future medical costs. Current earners, forced to cover three quarters of the cost, are left with less to save. Medicaid coverage of nursing home costs only after other assets are virtually exhausted undermines another savings motive.

Unemployment benefits, along with food stamps and other poverty programs, also reduce the need for a nest egg, “just in case.” And as illustrated by so many disasters and crises, government steps in to assist those who “need” it, reducing the incentives for financial self-responsibility.

Estate taxes also reduce successful savers’ ability to pass on assets as bequests, eroding another savings motive. And monetary policy that has long kept interest rates near zero have undermined incentives to save as well.

Together, these government policies punish savings heavily, resulting in large numbers without appreciable savings. But fixing that saving problem doesn’t require government to tell us to resolve to save more. It doesn’t require ever more government intervention to “solve” a problem its existing interventions have created. It only requires a government resolution to stop aggressively undermining incentives to save as it does now.

Gary M. Galles is a research fellow with the Independent Institute in Oakland, and a professor of economics at Pepperdine University. His books include Lines of Liberty (2015), Faulty Premises, Faulty Policies (2014), and Apostle of Peace (2013).