California, ICI spar over automatic retirement savings plan Secure Choice

The Investment Company Institute, the mutual fund trade organization, has offered several reasons California shouldn't offer a low-cost retirement plan for most private-sector workers that would be devoid of, lo and behold, mutual funds.

California's Secure Choice retirement program is edging toward passage in its Legislature. The program would have employers with five employees or more automatically enroll their workers in a state retirement program similar to an individual retirement account. Employees could opt out at any time and, at least initially, the money collected from each employee's paycheck would be invested in a pool of Treasury securities — rather than mutual funds.

The rationale: 7.5 million Californians work for employers who don't offer a retirement plan, and 66% of those people work for small businesses. While all workers can open IRAs, few of those without employer retirement plans do so.

Among the groups supporting the bill are AARP, the Asian Business Association and the Los Angeles Latino Chamber of Commerce. The ICI, naturally, is not among those groups.

On Monday, the Washington-based trade group issued a news release slamming the bill. “California Gov. Jerry Brown should carefully examine the costs and risks of legislation to implement the California Secure Choice Retirement Savings Program and stop it before it is implemented,” the release said.

“Secure Choice — as currently structured — does not present a viable means of expanding meaningful retirement savings for private-sector workers in California and carries tremendous risks that could put taxpayers on the hook for a bailout,” wrote ICI President and CEO Paul Schott Stevens. “The analysis used to advance this legislation paints an overly optimistic picture of this program's success and dangerously understates the economic risks to the state of California. Implementing Secure Choice as it stands now could damage California's fiscal health and create a new financial liability for state taxpayers.”

The ICI's full letter runs 68 pages and cautions that the proposed program would also be subject to the Department of Labor's new fiduciary rule for retirement accounts. The ICI also cautions the state plan could have problems under the Employee Retirement Income Security Act of 1974.

California officials disagree. “We didn't learn anything new from the letter,” said Marc Lifsher, a spokesman for California Treasurer John Chiang. “In March, the board that oversees putting together Secure Choice reported their findings that it was legally and financially feasible. They (the ICI) keep saying that taxpayers will be on the hook, but the law specifically says the state is not liable for the condition of the fund. It's like any IRA or 401(k): Its value will depend on market conditions.”

Financial services companies have been fighting the bill since at least 2012. Is the ICI simply trying to protect fund companies that might want inroads to the small-company 401(k) plan market?

“They seem to think this is a universe of potential customers, but this is not a group that has been served well in the past, nor have they been eager to avail of traditional retirement services,” Mr. Lifsher said. "They're not saying, 'Sign me up for an IRA.' A lot don't even have checking accounts. If the industry had been serving this group of people so well in the past, we wouldn't be having this problem.”

“Workers, employers and California taxpayers should be very concerned about this program," said ICI Chief Economist Brian Reid. "The state is forcing businesses to enroll workers in a complex plan charging fees well above the private-sector average that will deliver questionable retirement savings to participants. More can — and should — be done to strengthen the voluntary private-sector retirement system to help those who want to participate, but currently do not own an IRA or 401(k). This work should be done at the federal level. We have identified a number of risks inherent in the Secure Choice program, which could ultimately leave California taxpayers on the hook to cover costs if the program does not work as envisioned.”