California Secure Choice Board ‘Golden’ with State-Run Retirement Plan

The Golden State has taken another step on the road to implementing a state-run retirement program.

The California Secure Choice Board unanimously recommended that the state legislature move forward with the plan it was directed to explore under a 2012 law, submitting letters identifying its findings from the market analysis, program design, and financial feasibility study and its recommendations for implementing legislation for the California Secure Choice Retirement Savings Program. Kevin De León, D-Los Angeles, president pro tempore of the state senate, said he will put the board’s recommendation into a bill that he hopes will get to the governor’s desk by July.

As originally envisioned, all employers with five or more workers in California that don’t already offer a retirement plan would be required to automatically enroll their employees in the state-sponsored Secure Choice plan. 

The board recommended that legislation establish managed accounts that would be invested in U.S. Treasuries or similarly safe investments for the first three years of the program. Acknowledging that “legal and practical hurdles” remain to be overcome before other investment options could be implemented, it said the board should begin to develop investment options that “address risk-sharing and smoothing of market losses and gains at inception,” with options to include, but not be limited to, “custom pooled, professionally managed funds that minimize management costs and fees, the creation of a reserve fund, or the establishment of investment products.”

It also called for the board to conduct an annual peer review to compare California Secure Choice funds with similar funds on performance and fees, and said that the board will be required to seek to minimize participant fees. The recommendation called for implementing program features that provide maximum possible income replacement in an IRA based environment, with an initial automatic contribution rate of between 2% and 5% of salary.

The recommendation said that the board may implement automatic escalation of participants’ contribution rates up to 10% of salary with the option for participants to stop automatic escalation and change their contribution rates, and that the board and its contracted administrators and consultants shall have a fiduciary duty to the participants of the program. 

The board hired New York consulting firm Overture Financial to conduct a financial feasibility study and market analysis, and design such a program, resulting in a 518-page report issued last month and updated March 17. However, the Sacramento Bee notes that few of the options and recommendations from the report made it into the board’s recommendation. 

Under the Overture plan, each employee would have a Roth IRA funded through payroll contributions. The default contribution rate would be 5% of pay, escalating by one percentage point each year until it reached 10%. The report recommended two investment options: a target-date fund similar to those offered by 401(k) plans and a “pooled IRA with reserve fund packaged as a retirement savings bond.” Annual fees would be capped at 1%.

Just last week the Investment Company Institute sent a 30-page letter to the board raising questions about the plan, challenging the assumptions that produced the projected feasibility results, and saying that the matter warrants further attention. 

Last year Illinois became the first to adopt a state-based retirement savings program for private sector employees who do not have a retirement plan at work. Similar initiatives are underway in Oregon, Connecticut, Iowa, and Maryland. Washington State launched a small plan marketplace last year, an approach recently embraced by New Jersey.

Approximately half the states are currently considering measures to close the retirement coverage gap.

At President Obama’s direction, last November the Labor Department unveiled a proposed rule to clarify ERISA’s application to state-run IRA programs, in the process tilting the playing field in favor of those programs in competition with the private sector.