An Important Step Toward Solving California’s Retirement Crisis

Nari Rhee

California faces a retirement crisis. As we documented in our 2011 volume, Meeting California’s Retirement Security Challenge, a large share of workers in the state are at risk of serious economic hardship in retirement. Currently, only 45% of private sector employees in California have access to a pension or 401(k) at work. Low-wage workers, small business employees, and Latinos are least likely to have access. Social Security, while crucial, will not provide enough to keep such workers out of economic hardship in their golden years.

California Secure Choice: Creating a state-sponsored retirement plan for private sector workers. To improve the retirement income security of low- and middle-wage workers, the state of California enacted SB 1234 (California Secure Choice Retirement Savings Trust Act) in 2012 to create a simple, secure, and convenient way to save for millions of workers. Our state is the first to enact such a policy, and other states have followed suit in light of gridlock in Washington.

Program features include:

  • Expansive coverage through an employer mandate. Covers private employers with five or more employees that do not offer a retirement plan.
  • Automatic employee enrollment into a payroll deduction IRA, unless employees opt out.
  • Portability. The IRA account will follow workers from job to job, with no need to roll over funds.
  • Low-cost, professionally managed investment vehicle, privately managed and overseen by the program Board.
  • No employer or state liability. Employers will not be required to contribute to the program, nor be legally responsible for the Program or its investments. Neither will the State be liable for benefits.

SB 1234 also created the California Secure Choice Retirement Savings Investment Board to implement the Program, but required a feasibility study and additional legislative authorization before the Program could begin enrolling workers. In early 2015, the Board awarded the contract for the study to a consortium that includes the UC Berkeley Labor Center, Overture Financial, Segal Consulting, Greenwald & Associates, Bridgepoint Consulting, actuary Rowland Davis, and Arun Muralidhar. The final report was released in early February 2015. The report can also be found on the UCB Labor Center website.

After a public comment period, the Board will vote on recommendations to the legislature on March 28, 2016.

The following are fundamental questions addressed by the study, the findings, and key recommendations.

1. Will there be sufficient demand?

Yes. 70-90% of the 6.8 million workers eligible for the Program—or roughly 5 million workers—will participate. This is more than sufficient for the program to be self-sustaining.

2. What should be the default contribution rate?

Eligible workers are equally comfortable with a 3% or 5% contribution rate, according to a scientific survey conducted as part of the study. The vast majority of likely participants are also comfortable with auto-escalation of their contributions over time.

Recommendation: 5% default contribution for new participants, with auto-escalation in 1% annual increments up to a maximum of 10%

3. Will the Program be financially self-sustaining?

Yes. The Program will be financially viable and self-sustaining even under adverse conditions.

4. Can the Program operate on competitive fees?

Yes. Because of its large scale, the Program will be able to charge fees that are very attractive for low-income savers: 1% in the first few years, about 0.5% after year 5 of the Program, and even less in the long run.

5. What should be the default investment vehicle?

The study recommends two possible options, and the state must choose one:

Option 1: Target Date/Lifecycle style investment product that automatically shifts from stocks to bonds as a participant nears retirement

Option 2: Pooled IRA with Reserve Fund—a specially designed investment vehicle in which workers pool investment risk, and a gain/loss reserve is used to smooth investment returns over time and minimize the risk of large losses just before retirement.

What’s Next?

Public hearings. This week, the California Secure Choice Retirement Savings Investment Board will be hosting two public hearings on the program feasibility study. The Board will vote on recommendations to the legislature on March 28, 2016.

Los Angeles, Tuesday March 1, 2016, 2-5pm
Ronald Reagan State Building Auditorium
300 S. Spring Street

Oakland, Thursday March 3, 2016, 2-5pm
Elihu Harris State Building
1515 Clay Street

Webcast on CA and CT. As mentioned above, other states have passed similar laws as California. These include Illinois, Connecticut, and Oregon. Pew Charitable Trusts is hosting a Webcast on Lessons Learned in California and Connecticut Retirement Plan Study Results and Implications on Thursday, March 3, 11-1am PST. Speakers include Nari Rhee, Manager of the Retirement Security Program at the UC Berkeley Labor Center; Alicia Munnell, Chair of the Center for Retirement Research at Boston College; and officials in charge of the Connecticut, Illinois, and Oregon retirement savings programs. Click here to register.