California Payroll Retirement Savings Plan Can Take Hit

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

A Secure Choice lawyer thinks private-sector employees can still be automatically enrolled in the new state retirement savings plan, even if the Republican-controlled Congress repeals a regulation exempting state savings plans from federal pension law.

California and a half dozen other states are creating state-run “automatic IRAs” for employees with jobs that do not offer a retirement plan. If employees do not opt out, a payroll deduction will go into their new tax-deferred savings account.

Oregon plans to launch the first state retirement savings plan in July, a small pilot. Like the California Secure Choice lawyer, Oregon Saves also thinks the federal pension law allows an exemption without the specific language of the regulation, a spokesman said last week.

Secure Choice does not plan to begin payroll deductions until at least late in 2019, after preparation and enrollment for businesses with 100 or more employees begins in mid-2018. Smaller businesses, with five or more employees, will be added in the following two years.

An automatic payroll deduction for a tax-deferred Individual Retirement Account is said to be a proven way to increase savings. But it’s opposed by parts of the financial sector as competition and by conservatives as government expansion that could lead to more public debt.

State retirement plans are strongly backed by some public employee unions, who think improving private-sector retirement can help counter pressure to cut government pensions or switch to 401(k)-style individual investment plans, following the corporate trend.

Secure Choice advocates say the program is being created with donations and repayable state loans, will become self-sustaining under legislation that allows no debt liability for employers or the state, and the investments will be managed by private-sector firms.

The plan is needed, say advocates, because more than 75 percent of California’s low-and-moderate income retirees rely exclusively on Social Security and nearly half of workers are on track to retire with incomes below 200 percent of the federal poverty level.

Last month, fast-track legislation to repeal the Obama administration labor regulation, HJR 66 and 67, moved out of the House and to the Senate floor. Gov. Brown sent the California congressional delegation a letter urging opposition to the repeal.

“I understand that Wall Street institutions strongly object to California and other states setting up such systems,” Brown said in the letter, the Sacramento Bee reported. “They think the dollars that move into Secure Choice should instead flow into their own products.

“I consider this a feature, not a defect of Secure Choice. Indeed, we hope to enroll those who historically (have) not been served by the savings industry.”

State Treasurer John Chiang was among 19 state treasurers, including six Republicans, that sent a letter to the Senate opposing the repeal. A Chiang adviser, Ruth Holton-Hodson, has helped coordinate the opposition campaign.

The treasurer is authorized by the legislation that created Secure Choice to appoint an executive director. His board representative, Steve Juarez, said two of the nine board members, Yvonne Walker and Heather Hooper, will assist in the selection expected soon.

A Secure Choice exemption or “safe harbor” from the federal pension law, ERISA (Employee Retirement Income Security Act of 1974), is needed to reduce opposition from business employer groups and the potential for lawsuits.

Chiang and Senate President pro Tempore Kevin de Leon, D-Los Angeles, who first proposed legislation for the program in 2008, joined officials from other states in urging the Obama administration to issue a labor regulation exempting Secure Choice-style programs from ERISA.

A Secure Choice attorney, David Morse of K&L Gates, told the board last week that the regulation specifically says employees with no workplace retirement plan can be automatically enrolled in a state-mandated program that allows employees to opt out.

But the regulation also says it’s only the view of the Labor department, not the only way to create an exemption, and the final determination of whether a program is exempt from federal pension law will be made by the courts.

If the fast-track resolutions are blocked in the Senate, the repeal of the regulation could be pursued through the standard regulatory process, which unlike the fast-track allows public hearings, Holton-Hodson told the board.

Morse said that if the regulation is repealed Secure Choice could return to the original plan to use the exemption provisions in the 1974 federal pension law, with some Labor guidance issued later.

“It’s not like you have to start from zero,” Morse said. ‘We would go back to trying to rely on the old safe harbors to keep the program free from ERISA regulation. So, it doen’t mean that it’s the end of the road.”

Juarez said talks have begun with Morse and the state attorney general’s office about possible modifications in the final Secure Choice legislation signed last September by Brown in a ceremony with De Leon, the author of SB 1234, Chiang and others.

“Our thought is we have to prepare for the worst, but hope for the best,” said Juarez.

Employees would contribute 3 percent of their pay to Secure Choice under the legislation, unless altered by the board. The board also could increase the contribution by 1 percent of pay a year up to 8 percent. Employees would have the option of setting their own rate.

Investments during the first three years would be in U.S. Treasury bonds or the equivalent, giving the board time to develop options for riskier higher-yielding investments protected against losses, possibly by insurance or pooling investments to build a large reserve.

Taking a different path, Oregon Saves investments will be in “target date” or “aged-base” funds that shift the amount of stocks, bonds and other assets to less risky but lower-yielding investments as the employee approaches retirement age.

Oregon Saves options are a conservative “capital preservation” fund to limit the risk of loss and, going the other way, an “investmentment growth” fund with higher yields and a higher risk of loss. The Oregon plan has no guarantee preventing losses.

Secure Choice is operating this fiscal year with a $1.9 million state loan that will be repaid from an administrative fee collected from employee investments that cannot exceed 1 percent of total assets.

Donations totaling $1 million for a feasibility and market study came from very different sources. The California Teachers Association and the SEIU each contributed $100,000 of the match for a $500,000 grant from the Laura and John Arnold Foundation, often vilified by unions for supporting public pension reform.

Yvonne Walker, president of the largest state worker union, SEIU Local 1000, is a member of the Secure Choice board. She joined Jon Hamm, Highway Patrol union executive, in a proposal at a legislative hearing in 2011 on Gov. Brown’s pension reform.

Look at ways to improve retirement security for private-sector workers, the two union officials told lawmakers, instead of only focusing on cutting public employee retirement benefits.

De Leon’s original bill in 2012 drew on proposals from several policy, labor and consumer groups in addition to the National Conference on Public Employee Retirement Systems, said a report last year by the Center for Retirement Research at Boston College.

“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,” said the report by Alicia Munnell and others.

A proposed state constitutional amendment, SCA 1 by Sen. John Moorlach, R-Costa Mesa, would prohibit the state from incurring liability for Secure Choice benefit payments and bar state general funds for Secure Choice after the startup and first-year administrative costs.