New State-Run IRA for Private Sector Opens July 1
Wednesday, June 19, 2019
A new state workplace retirement savings program, CalSavers, will open to an estimated 250,000 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 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 appointees.
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.