Union Backs Pooled IRA Option for New California-Run Savings Plan

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.

As a new California board, Secure Choice, gets ready to recommend a state-run savings plan later this month that could automatically enroll most small business employees, a large union is pushing an option that would eventually offset investment losses.

Last week Service Employees International Union, which includes government and private-sector employees, used news conferences and testimony from workers at board hearings in Los Angeles and Oakland to push for a “pooled IRA with a reserve.”

On March 28 the Secure Choice board is scheduled to choose either the pooled IRA or a more traditional tax-deferred IRA that, like most 401(k) plans in the private sector, has little or no protection against investment losses unless expensively insured.

The innovative pooled IRA, described by some as a “variable-rate savings bond,” would in years with high investment yields put some of the money into a reserve, which could be used to offset losses in years with low yields or losses.

“In addition to mitigating risk for future retirees, a report commissioned by the board found the Pooled IRA with Reserve would also generate the best returns for all participants,” said an SEIU news release.

Models project the reserve could reach 40 percent of the total fund in 20 to 25 years, enough to offset an investment loss like the one in the recent financial crisis. Each year the Secure Choice board would decide whether to build or dip into the reserve.

Some potential problems: liability for board decisions on crediting the “savings bond” and managing the reserve, generational equity (contributing to the reserve before its large enough to offset losses), and pressure to spend large reserves.

The nine-member Secure Choice board chaired by state Treasurer John Chiang has been working for 2½ years on an “automatic IRA” payroll deduction for the more than 6 million California private-sector workers not offered a retirement plan on the job.

Employees of employers, who have five or more employees but do not offer a retirement plan, would be automatically enrolled in the state plan, unless they opt out. A payroll deduction is said to be a proven way to sharply increase retirement savings.

In 2007 while still in the Assembly, Senate President Pro Tempore Kevin de Leon, D-Los Angeles, first introduced legislation for a state-run retirement savings plan, finally getting approval of a modified version five years later, SB 1234 in 2012.

But there were tight restrictions: a legal and market analysis not paid for by the state, exemption from federal retirement law, IRS tax deferral, and a self-sustaining plan with no employer liability or state liability for benefit payments.

A big step toward raising $1 million for the legal and market analyses was a $500,000 matching grant from the Laura and John Arnold Foundation. Another big step was Obama administration guidelines last fall for avoiding federal ERISA retirement law.

Now the Secure Choice board is preparing to choose the retirement savings plan to send to the Legislature, where it could be modified, rejected or approved as proposed and sent to the governor for enactment.

De Leon’s bill was the first successful legislation among state attempts to provide retirement plans for private-sector workers, said a report issued last week by the Center for Retirement Research at Boston College (see chart).

The report said the De Leon bill drew on proposals from academic research and the National Conference on Public Employee Retirement Systems, the largest trade association for public pensions in the United States and Canada.

“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 CRR report by Alicia Munnell and others.

Last January, Connecticut said it became “the first state in the nation to complete a market feasibility study” of a state-run retirement savings plan for private-sector workers.

The new Connecticut Retirement Security Board, established in 2014, is now working on legislation for a traditional or Roth IRA with no reserve. The study said the plan could become self-sustaining after receiving $1 billion in assets in two years.

Illinois has not completed a feasibility for its “automatic IRA” plan, but does not need to go back to the Legislature for approval, said the CRR report. Oregon aims to complete a study by this fall and have an operating “automatic IRA” plan in 2017.

Washington and New Jersey have “marketplace” plans to give employers information and a website listing pre-screened retirement plans. Massachusetts is considering an “automatic IRA” and a multiple employer plan to share 401(k) costs.

In New York, Gov. Andrew Cuomo appointed a commission to study the issue. New York Mayor Bill de Blasio announced last month his city is the first to work on an “automatic IRA” plan for employers with 10 or more employees.

“This is the latest announcement by the Mayor aimed at lifting up working families — from paid sick and parental leave, to living and minimum wages, this has been a focus of the de Blasio administration,” said the mayor’s news release.

At the Secure Choice hearing in Oakland last week, representatives of two large business groups said the California market and feasibility study by Overture Financial did not answer key questions given to the board last fall.

“As we stated before when we were dealing with this in the legislative arena, we were able to come to an agreement due to the wise counsel of the governor’s office to be able to have a study of this program prior to going forward,” said Nicole Rice of the California Manufacturers and Technology Association.

The CMTA and the California Chamber of Commerce lifted their opposition to the De Leon bill to allow a feasibility study. Among their unanswered concerns: employer costs, a lasting ERISA exemption, and whether adequate record keepers can be found.

Board member Yvonne Walker, SEIU local 1000 president, asked the business groups for their recommendations. Board member William Sokol, a benefits lawyer, said he was reminded of past encounters with “paralysis by analysis.”

Marti Fisher of the Chamber of Commerce said the groups lack the economists and labor law experts to answer some of the questions. She said the intent is to “give you thoughtful input and questions,” not to stall the launch of the program.

“We do want to make sure we remain on the record as not opposing the program,” Fisher told Walker.

More than two dozen workers spoke at the hearing about growing old without adequate retirement benefits. Two said they were raising families while working at fast-food restaurants, McDonald’s and Burger King, that offer no retirement plan.

“We are just asking right now to get something in place so that the employees can put in their money so that they can have something for themselves,” Connie Chew of SEIU Local 521 told the hearing. “But I think in the long run we need to bring pensions back.”