California Secures State-Run Retirement Program

By Andrew Remo • August 26, 2016 • 0 Comments
Four years after enactment of the California Secure Choice Retirement Savings and Trust Act (S.B. 1234), the California Assembly passed legislation Aug. 25 approving the program’s implementation beginning Jan. 1, 2017. Gov. Jerry Brown (D) is expected to sign the implementation bill into law.

At that point, California will become the eighth state to create a retirement program for private sector workers. The California Secure Choice Retirement Savings Program — similar to the programs created by state law in Connecticut, Illinois, Oregon and Maryland — is a state-administered automatic enrollment payroll deduction IRA program. One interesting note: Unlike some of the other state-run programs introduced thus far, the California program allows not just for Roth IRAs, but for traditional IRAs and individual retirement annuities as well.

When the program is fully phased in, California will require employers that have five or more employees to automatically enroll workers into the program if they do not otherwise offer a qualified retirement plan or a private sector automatic enrollment payroll deduction IRA program to their workers.

Cost Conscience

In a new policy wrinkle, the bill directs the board running the program to establish managed accounts for participants that will be invested in Treasuries, myRAs or similar investments for the first three years of the program. This would enable participants in the program to build up an account balance without incurring any initial investment fees. In addition, the bill allows for the state to provide seed funding for the administration and operating costs of the program for the first year, but would require the board to repay that funding amount, with interest, over time. As of the sixth year after implementation, the legislation puts a 1% cap on the administrative and operating costs of the program.

Participants in the program would, unless otherwise specified, have 3% of their pay deposited to the program (the board may adjust that amount from 2% to 5% if they choose). The bill also allows the board to implement an annual automatic escalation of employee contributions not to exceed 8% of pay. Participants can opt out of this escalation, change the contribution rate to any level, or choose not to participate in the program at all.

Labor Department ‘Nudge’

The legislature of the most populous state in the nation passed its retirement law the same day that the Department of Labor finalized regulations creating a non-ERISA safe harbor for state administered auto-IRA programs (the final rules will become effective 60 days after publication in the Federal Register). The DOL also proposed an addition to the rule allowing cities to create similar retirement savings plans if they are in a state that lacks a statewide retirement savings program for private sector employees, though it was limited to cities with populations at least equal to the least populous state — in this case, Wyoming (which has about 582,000, according to the U.S. Census). Roughly 30 cities would meet that criterion at present.

This guidance from the federal government could encourage even more states to follow in the Golden State’s large footsteps.