The third — and largest — state-sponsored retirement program opened for business July 1 in California.
The new CalSavers program is required for all California employers with five or more employees that don't already offer a retirement program, covering an estimated 7.5 million people.
Employers with more than 100 employees must register by June 30, 2020; those with 50 to 100 workers have until 2021; and those with five to 50 have until 2022.
Self-employed workers can start the program in September.
The automatic enrollment payroll-deduction IRA is operated as a private-public partnership overseen by the California Secure Choice Retirement Savings Investment Board, chaired by state Treasurer Fiona Ma.
Employees can choose their own contribution rates up to standard IRA maximums. The accounts have five investment options and are portable. Employees can opt out if they wish.
The program will be administered by Ascensus, which manages similar programs in Oregon and Illinois. State Street Global Advisors will manage investments for four passive funds, and Newton Investment Management will manage the CalSavers ESG Fund. Other firms involved with the program are consultants Meketa Investment Group Inc. and AKF Consulting, and law firm K&L Gates LLP.
Depending on funds chosen, fees at program launch are 82.5 to 95 basis points. That includes 75 basis points for program administration, a 5-basis-point state administrative fee, and investment manager fees ranging from 2.5 basis points for a bond fund to 15 basis points for the environmental, social and governance fund.
Katie Selenski, executive director of the new CalSavers program, said in an interview that a pilot program helped state officials do some fine-tuning, including adding the ESG equity fund. They were also encouraged to see that the employee opt-out rate was 22.5%, leaving nearly 1,600 savers in the pilot phase, and that the average contribution rate was 4.93%, close to the default rate of 5% per paycheck.
Savers who don't opt out of automatic escalation will see an automatic annual increase of 1% of salary, up to a maximum of 8%.
The pilot program also stressed the importance of employer engagement and the need to keep things simple, Ms. Selenski said. One reason for choosing Ascensus was that "they have demonstrated experience with Illinois and Oregon, and they understand that outreach and marketing is going to be very, very important," she said.
CalSavers officials would consider the program a success if employers seek out other retirement products including 401(k) plans that allow higher contribution limits and an employer match. Employers cannot make matching contributions with the CalSavers program.
"If the industry innovates and figures out ways to offer cheaper, better plans for small businesses, it would be perfectly fine. We are going to measure our success not simply by the number of CalSavers, but by participation overall in the state," Ms. Selenski said.
With the largest number of residents not part of a retirement plan, California is hoping to spur other states to adopt programs, including another nine states that have enacted enabling legislation, and another 14 states considering programs.
While it has been an 11-year effort since the first bill was introduced in California, in part because of resistance from financial services firms, secure choice advocates are hopeful that more asset managers will see opportunities.
According to Cerulli Associates, results from the first state program, OregonSaves, suggest that mandated state-sponsored retirement plans will attract participants and see gradual asset growth. "Asset managers recognize that they are playing the long game if they choose to participate in this market segment," a Cerulli Associates report said.
Two years after its launch as a pilot program and now halfway through a statewide rollout, OregonSaves has $23 million in assets and new features in the works. In June, the Oregon Legislature passed two bills making it easier for businesses already offering plans to claim exemption, and allowing the state to partner with other states on private-sector retirement programs.
