The $6.6 Billion Mandatory Retirement Fund Your Workers Haven’t Heard of

California has never been a state to shy away from trailblazing into untested waters, and it is about to forge ahead in a new field: retirement savings. The state is upending the private financial sector with its new California Secure Choice Retirement Savings Trust Act, a public-private retirement option for employees to take advantage of what looks like will be better than any private company’s current offerings. 6.3 million private-sector employees in the state of California currently aren’t offered a retirement plan at work, and this measure is intended to address that looming problem.

Here is some information on the mandatory—yes, this program will be mandatory for employers to offer to employees—act that Governor Jerry Brown signed into law last year:

Facets of the law

1. If you are a non-governmental employer with five (5) or more employees, you must make a retirement plan available to your employees.
2. Employers will be able to use any employer-sponsored program available, from 401(k) plans to automatic payroll-deduction IRAs.
3. The law requires a “Retirement Investments Clearinghouse” to be established online to list different registered venders and retirement programs that employers can choose; it will be funded by vendors interested in participating.
4. If, as an employer of five (5) or more people, you have not implemented a retirement savings plan for your employees by the time the program goes into effect, you will automatically enroll your employees in the new state-sponsored payroll-deduction retirement savings program. If you employ fewer than five (5) people you may choose to participate in the state program, but will not be required.
5. At any time an employer who was enrolled in the state plan can choose to drop out and instead use a private retirement savings provider.

The California Secure Choice Retirement Savings Program

1. Employees may choose to opt out. This program is only required to be offered by employers; it is not required to be utilized by employees. Employees who opt out will automatically be re-enrolled every two years, but can opt out again.
2. Employers who do not allow for the payroll reduction will be fined $500 per eligible employee.
3. The program stipulates that 3% of employees’ pay be withheld and sent to the state’s new CSCRS Investment Board, though the Board can change the withholding amount anywhere from 2% to 4%.
4. Professional independent investment managers—private firms and the California public pension manager, Public Employees’ Retirement System, that will be picked through a bidding process—will conservatively manage the money collectively contributed by the withheld wages (expected to amount to approximately $6.6 billion). There will be an oversight board.

The Act stipulates that before implementation, a board appointed to oversee the program must raise private money to pay for more research and analysis of the program to work out any kinks. The program will then be submitted to the IRS to ensure equal tax incentives to other IRAs, and will then need to be re-voted on in the state legislature. This means the program won’t start until at least 2015.

Other states are debating similar plans, so California’s will definitely be a model to watch in the coming years.

Benefits

With 57 percent of American workers currently having less than $25,000 in savings according to an ERBI study, it’s clear that a change is needed in the retirement savings landscape. With the program, California will guarantee a minimum rate of return via private insurance and reserves to ensure against losses, though that rate has not yet been announced.

Because savings from multiple generations of workers who will retire at different times are pooled together, this balances risks and allows for higher returns. If an employee retires in a bad market, reserves from other employees will cover any losses at that moment. This program also allows independent contractors to opt into the program as well. And, employers would have no responsibility or liability other than sending withheld wages to the investment board.