By Mark Miller
CHICAGO, Sept 14 Is California about to set the
country's retirement saving system on its ear?
The state has often set trends for the country in areas
ranging from the environment to food and popular culture. Now,
California is moving toward launching an innovative new approach
to retirement saving that addresses two key problems facing
Americans: the lack of workplace pension programs among small
businesses and the structural shortcomings of 401(k) plans.
The state's legislature recently passed a bill laying the
groundwork for the California Secure Choice Retirement Savings
Program (SCP) - a government-sponsored retirement-savings
vehicle that would be offered to employees of every California
company that doesn't have a workplace retirement plan.
Employees would contribute through payroll deductions to SCP
accounts; the plan's investments would be professionally
managed, and would be geared to produce conservative returns
tied to Treasury bond rates. At retirement, the individual
account would be converted to a pension-style annuity.
The plan is still a long way from implementation. It faces
opposition from the California business community on concerns
about the cost of implementing payroll deduction systems and
potential legal liability issues for employers.
The mere fact that California lawmakers decided to push
forward with the plan at all underscores growing worry in policy
circles about the nation's looming retirement savings gap and
the need to do something about it.
Just 42 percent of private sector workers age 25-64 have any
pension coverage in their current job, according to a new report
by the Center for Retirement Research at Boston College. And for
many workers who do have 401(k) accounts, performance is
hampered by high fees and bad asset allocation decisions.
The problem is most acute among low- and middle-income
workers, and those who work for small companies. In California,
for example, 55 percent of companies with 50 to 99 employees
have no retirement plan, and 67 percent of companies with 10 to
49 workers don't have a plan.
In Washington, the Obama Administration has been pushing the
Auto-IRA as a national solution, a plan that would require
employers with more than 10 employees and no pension coverage to
contribute three percent of the worker's salary into an IRA that
benefits from various tax credits. The Administration also has
proposed a set of policy changes aimed at encouraging use of
commercial annuities alongside workplace accounts as a way of
improving guaranteed income in retirement.
And last month, Senator Tom Harkin (D-Iowa) proposed a
mandatory cash-balance defined-benefit program for employers who
do not offer a minimum level of retirement benefit via automatic
None of these ideas are going anywhere in the current
Washington climate. So some retirement policy advocates have
been working to convince states to sign onto ideas resembling
the Harkin plan. So far, plans similar to California's have been
proposed or discussed in 11 states, in addition to California.
Some states have passed small scale plans but California is
the only one to approve a broad pension scheme that could grow
to cover millions of workers.
BUMPS IN THE ROAD
In California, the SCP legislation, called Senate Bill 1234,
is set to be signed by Gov. Jerry Brown. The bill authorizes
study of regulatory and legal questions that need to be resolved
before the plan can go forward via additional legislation.
Following that legislation, a state-run board would be created
to oversee the SCP, with a third party handling administration
and assuming fiduciary duty. That could be a financial services
company, or the California Public Employees' Retirement System
Employers who don't have their own retirement plans would be
required to enroll workers in an IRA account via payroll
deductions, although workers could opt out if they choose.
Employers wouldn't be providing matching contributions, and the
accounts would have a guaranteed minimum 3 percent annual
The accounts would be portable, following workers from job
to job. And at retirement, the cash balances would be converted
to lifetime annuities.
The SCP has the potential to grow into a very large plan.
Six million Californians work for companies without workplace
plans, according to Dan Reeves, chief of staff for California
state senator Kevin de León, the bill's sponsor. Reeves thinks
the SCP's opt-out feature would enroll around 5 million in the
"We know payroll deductions are vital to saving for
retirement, and we think the opt-out feature would scale this up
very quickly," he says.
A key question is how the SCP would be treated under the
Employee Retirement Income Security Act of 1974 (ERISA) and the
Internal Revenue Service code. Before the SCP could go forward,
the state will need affirmation from the Department of Labor
that the plan is exempt from ERISA, since it utilizes IRA
accounts and is not an employer plan. And the IRS would have to
sign off on the use of pre-tax payroll contributions.
"The business community doesn't believe you can devise a
mandatory employer-implemented plan that is both exempt from
ERISA and accepts pre-tax contributions," says Marc Burgat, vice
president of government relations at the California Chamber of
Reeves say implementation is at least three years away. But
if the SCP does get off the ground and proves successful, it
could set off a wave of innovative pension programs in other
Here's hoping that's not just "California Dreamin'".