Calif. leads way in creating retirement savings accounts
California took a major step toward ensuring all of its workers have an opportunity to save for retirement when Gov. Jerry Brown (D) signed the California Secure Choice Retirement Savings Program into law earlier this month. It creates a system where employees can have money deducted from their paychecks and deposited into low-fee, professionally managed retirement savings accounts.
The funds will be deposited into a trust administered by an investment board made up of public and private-sector officials appointed by the legislature and governor. The funds will be pooled and managed by professional investment managers hired by the board through competitive bids. The California Public Employees Retirement System could be one of the investment managers.
The legislation sets out a list of requirements to ensure the funds are conservatively managed. The board is also authorized to purchase insurance and use a reserve fund to ensure no participant loses money and to set a guaranteed return on the investments, much like cash balance retirement plans.
The program will be funded through fees paid by participants and will receive no tax support.
After it is phased in, all employers with five or more employees that do not offer an employer-sponsored retirement plan are required to set up a payroll deposit system to allow employees to participate in the program. Any employer may choose to participate in the program.
All employees will be enrolled in the program and will have 3 percent deducted from their paychecks and deposited in their accounts. Employees can opt out of the program at any time.
Employees can maintain their accounts as they move between jobs in California. Upon retirement, the balance will be converted to an annuity that will provide a guaranteed monthly payment for life.
Before the program can be implemented, the investment board must conduct a market analysis to determine if the accounts will be financially sustainable. It also must ensure they will qualify for the same favorable federal tax treatment accorded to Individual Retirement Accounts.
The University of California at Berkeley's Center for Labor Research and Education estimates that 62 percent, or 6.2 million, of California's private-sector workers have no access to any type of retirement savings plan at work.
The Bell estimates that almost 60 percent, or 1.6 million workers, in Colorado have no access to retirement savings plans at work. National data and the Berkeley study show that younger people, low-wage workers, women, minorities and small-business employees are least likely to have access to work-based retirement savings.
The Bell has long advocated creating Colorado Voluntary Pension Accounts similar to those created in California.
Links
University of California-Berkeley study
California Secure Choice Retirement Savings Program (legislation)
Bell Policy Center Blueprint brief
Article posted on October 26, 2012