Before anyone panics, let me say up front that employers do not have to fund any of this with their own money, you just have to set this up in your payroll so that a percentage of an employees check goes to a State run retirement program. So now let me tell you what we know:
Gov. Jerry Brown is scheduled to sign legislation Thursday to automatically enroll nearly 7 million people in a retirement savings account, an attempt to address growing fears that many workers will be financially unprepared to retire.
The legislation creates a state-run retirement program for workers who don’t have an employer-sponsored plan, many of them working in lower-wage positions. It requires employers to automatically enroll their workers and deduct money from each paycheck, though workers can opt out or set their own savings rate. The account could also be carried from job to job. It is suggested that originally 5% would be deducted and it would go up by 1% per year until it settles at 10%. I do not know many workers, especially low income people that can afford 10% of their income being taken away for this program.
Supporters of the concept hope that requiring workers to affirmatively opt out will make them less likely to do so, but it is up to employers to make sure all employees will be aware of this program and that they can opt-out. Experience from the health insurance program is that most employees will opt-out if it involves their own money.
This bill is known as SB1234 by Senate President Pro Tem Kevin de Leon, D-Los Angeles. It will be called SECURE CHOICE. You may thank him directly if you are so disposed or let him know what you think of his idea at https://sd24.senate.ca.gov/contact/email
Below are some key points. This program will not open until the 9 member panel charged with oversight of the program is installed, so this may not start for a year or two.
KEY FEATURES OF THE CALIFORNIA SECURE CHOICE RETIREMENT SAVINGS PROGRAM:
Governing and Oversight Board
The California Secure Choice Retirement Savings Investment Board (https://www.treasurer.ca.gov/scib/) is modeled after ScholarShare, California’s 529 College Savings Plan. The Board is comprised of nine members: the State Treasurer (Chair), State Controller, Director of the Department of Finance, a retirement savings and investment expert appointed by the Senate Rules Committee, an employee representative appointed by the Speaker of the Assembly, a small business representative appointed by the Governor, and three additional public members appointed by the Governor. Page 3 of 4
The Board is charged with the administration of the Secure Choice Program, and to date has overseen the completion of the legal analysis and the mandated market analysis and feasibility study. In moving forward with the full implementation of the program, the Board will be the ongoing administrator for the hiring of private firms to manage the investment portfolio and the individual retirement savings accounts.
Disclosures for Employees and Employer Liability Protections
Employees offered the opportunity to participate in the Secure Choice Program will receive a program information packet with a disclosure form that includes the benefits and risks of making retirement contributions, the mechanics of how to participate in or opt out of the program, the process for the withdrawal of retirement savings, and how to obtain additional information about the program.
The disclosure form will clearly inform employees that employers are not liable for their decisions whether to participate in or opt out of the program, or for employee investment decisions, and state that their employer is not a fiduciary of the California Secure Choice Retirement Savings Trust or program, the employer does not bear responsibility for how the program is administered, and the employer is not liable with regard to investment returns and benefits paid to program participants.
In addition, the disclosure form will notify employees that the program is not an employer-sponsored retirement plan, their employers are not in a position to provide financial advice, and that they should contact financial advisors if they want to seek financial advice.
To notify employees that the state is not liable for the retirement savings benefit, the disclosure form will also specify that the Secure Choice program fund is not guaranteed by the State of California.
Employees that choose to participate in the program will be required to acknowledge that they have received and read all of the disclosures.
Employee Participation in the Secure Choice Program
When the Secure Choice Board officially opens the program for enrollment, only employers that do not offer their own employer-sponsored retirement plan (such as a 401(k), SEP, or SIMPLE plan) or automatic enrollment payroll deduction IRA will have to perform the ministerial duty of supplying the information packet and disclosure form, and allow their employees to remit contributions through payroll deduction.
Employees will be automatically enrolled, and employee participation will be phased-in over a three year timeframe, starting with the largest employers:
Employers with 100+ employees: allow employee participation within 12 months of the Board opening the program for enrollment;
Employers with 50+ employees: within 24 months;
All other eligible employers: within 36 months.
Participation by employees will be completely voluntarily, and employees will retain the ability to opt out at any time.
The default employee contribution rate will be set at 3%, with Board authority to adjust the amount between 2-5%. Through regulation, the Board could also establish an auto-escalation contribution rate, capped at 8% of salary with a limitation on increasing the rate no more than 1% annually. Employees will be able to specify their level of contribution if they do not want to contribute the default rate, and could also opt out of auto-escalation at any time. Page 4 of 4
Employees that already have access to a workplace retirement plan could also voluntarily participate in the Secure Choice Program. However, their employer will not be obligated to allow them to use their payroll system to make automatic payroll contributions to the program.
Role of Employers
Employers that opt to make the Secure Choice Program available to their employees will not bear any fiduciary responsibility and will not be required to pay administrative fees or comply with federal quarterly-reporting mandates. The administrative function of employers will be limited to providing employees with the program information packet and disclosure form, and allowing their employees access to their payroll system to make payroll deductions to the program.
Due to current federal prohibitions, voluntary employer contributions to employees’ individual retirement accounts will only be permitted if there is a future change in federal law and employer contributions would not cause the Secure Choice Program to be treated as an employee benefit plan under ERISA.
WE WILL WRITE MORE ON THIS TOPIC WHEN THERE IS MORE INFORMATION AND WE ARE NEARER TO IMPLEMENTATION.