California State-Run Retirement Program Signed Into Law

Employees will be defaulted at 3% of salary into “a personal retirement plan, with the option to opt out or change contributions at any time.”

By John Manganaro | September 30, 2016
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California Governor Jerry Brown has signed the California Secure Choice Retirement Savings Act, taking the next step in implementing one of the nation’s first state-sponsored, auto-enrolled retirement savings programs for the private sector.

The measure is anticipated to impact as many as 7 million private sector workers in California who did not previously have access to tax-advantaged retirement savings accounts in the workplace.

The California Secure Choice Retirement Savings Program has received a lot of positive press for bringing much-needed attention to a difficult policy issue—but others warn the program could do more harm than good if not implemented and managed carefully. According to lawmakers who voted in support of the measure, Secure Choice is nothing more or less than “a completely voluntary workplace retirement savings plan that enables participation through automatic employee payroll contributions into a personal retirement account managed by the California Secure Choice Retirement Savings Investment Board.”

Practically speaking, employees will be defaulted at 3% of salary into “a personal retirement plan, with the option to opt out or change contributions at any time.” There will be automatic escalation of contribution rates up to 8% of salary, with participant ability to stop or change the rate.

“For up to the first three years of the program, the state’s management board will establish managed accounts invested in U.S. Treasuries, or similarly low-risk investment, and develop investment options that address risk-sharing and smoothing of market losses and gains. Participant fees would be low,” lawmakers promise. In addition, the state board and its relevant contractors would have a fiduciary duty to the participants of the program.

The law applies to employers with five or more employees who do not offer an employer-sponsored retirement plan. These employers will be required to either establish their own in-house plan, or provide their employees with payroll deferral access to California’s Secure Choice Retirement Program. According to lawmakers, mandated employers themselves would be exempt from Employee Retirement Income Security Act (ERISA) liability.

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