The California Secure Choice Retirement Savings Investment Board on Monday unanimously approved final recommendations to the state Legislature for creating a mandatory payroll deduction IRA program for private sector workers who have no employer-provided retirement plan.
“Today we stand assured that the Secure Choice program is feasible and will be able to reach self-sustaining status within 10 years,” Acting Executive Director Cristina Elliott told the board. The panel also advanced an agreement with Oregon and Illinois to share legal costs for clarifying the programs’ status with federal regulators.
The recommendations are based on a market analysis and financial feasibility study conducted by institutional financial consultant Overture Financial of a mandated program for employers with five or more workers that are not now offering a retirement savings plan. The Overture report calls for a default employee contribution rate of 5% into a Roth IRA, with the choice to switch to a traditional individual retirement account, and auto escalation after the program’s first year. It also recommends allowing other employers to participate.
The Overture report recommends two options: launching the program with target-date funds or a pooled IRA, with a California public authority managing a single investment pool. Likely employee participation rates of 70% to 90% are high enough to achieve broad coverage “well above the minimum threshold for financial sustainability,” the report said.
The Investment Company Institute called on the California board to delay action, saying in a March 24 letter to state Treasurer John Chiang that the “flawed” report is based on “unrealistic or incomplete” assumptions, including administrative costs and workforce demographics.
Nari Rhee, co-author of the Overture report and manager of the Retirement Security Program at the University of California/Berkeley Center for Labor Research and Education, responded to ICI and other challenges saying the methodology is based on conservative assumptions. “Especially in a state as large as California, it’s going to be pretty easy to reach a scale that is going to be cost-efficient,” Ms. Rhee said in an interview. Fees are likely to be capped at 1% of AUM for the first few years, she said.
“Now it’s time for the Legislature to take the torch,” California Senate President pro Tempore Kevin de Leon, sponsor of legislation creating the secure choice initiative, told the board Monday. “This is a huge, huge win for California … and dozens of other states around the country.”
The Legislature will work on legislation enacting the program.