California Gov. Edmund G. Brown Jr. signed legislation Thursday to implement a state-run Secure Choice retirement savings program for 7 million private-sector employees who lack access to a workplace plan.
The plan is expected to be put into effect by 2018.
“Millions of Californians work for employers who do not offer any retirement savings plan,” Mr. Brown said at a bill-signing ceremony in Sacramento. “This bill helps ensure that every California worker can save for retirement.”
The program requires employers with five or more employees to automatically enroll participants in an individual retirement account with an initial default contribution rate of 3%, which could ultimately increase to 8%. Employers also have the option to start their own retirement plan. Employees can choose to opt out.
For the first three years of the program, the Secure Choice plan would establish managed accounts invested in U.S. Treasuries, or similarly low-risk investments. During that startup period, it is expected the board would develop other investment options to be rolled out after the initial time period.
With the signing of the legislation, California becomes the eighth state to implement a state-sponsored retirement plan for private-sector employees.
More than two dozen other states have been considering similar programs. Legislation to create a federal retirement program for non-covered workers has been stalled in Congress.
The California legislation has been opposed by the Investment Company Institute, which represents money management companies that offer their own retirement products. The ICI has maintained that state-run plans could compete against private companies and that ultimately California taxpayers could be stuck with shortfalls in the program.
California officials say those covered under the program have no retirement coverage, rejecting the ICI's argument that the program would be taking business away from money managers. They also say the program is designed to be self-supporting and taxpayers would not be on the hook for any shortfalls.
Some money management or administrative firms could ultimately benefit from the program if they are chosen to be part of its operations.
A Secure Choice board is overseeing the program and will be selecting firms to administer the plan and manage the assets.