‘Portable’ pensions: Historic changes loom

In a decision that could serve as a national model, Gov. Jerry Brown is considering legislation to allow millions of private-sector employees to steadily build their pensions without interruption — even when they change jobs.

The program, called Secure Choice, would be one of the country’s few state-run, automatic and portable retirement fund for private employees and could directly affect some seven million California workers. California is one of eight states that have passed similar legislation – the others are Connecticut, Illinois, Maryland, New Jersey, Oregon, Massachusetts, and Washington – and the California version is viewed as one of the most comprehensive.

Despite the apparent need for the program, however, the move has been a long time coming in California.

“People are expected to bear much of the risk of retirement savings themselves and many don’t have access [to savings programs],” said Grant Boyken, executive director of the Secure Choice Investment Board. “The outlook for subsequent generations is even worse.”

The new plan, in which employees initially invest 2 percent to 5 percent of their pay in a low-risk retirement account, is intended to resolve what many experts describe as an impending crisis in workers’ savings. The pensions would be administered by a nine-person board that includes the state treasurer and controller, as well as small-business representatives, employers, employees and financial services experts.

Gov. Brown has until the end of September to decide whether to veto Secure Choice, sign it or let it become law without his signature.

Despite the apparent need for the program, however, the move has been a long time coming in California.

The bill is SB 1234, by Senate Leader Kevin de León, D-San Diego, who has long sought the pension changes. As a member of the Assembly in 2008, he introduced the first legislation dealing with the issue, making him one of the first legislators in the nation to attempt a state-supervised retirement program. That bill died in a Senate committee.

About 6.8 million Californians would be eligible for the state-run program.

Four years later, De León – now in the Senate — sponsored the first version of SB 1234, which established the Secure Choice board, chaired by Treasurer John Chiang.

Once the board was created and ordered to conduct a feasibility study, there were still obstacles. The 2012 bill ensured that the state would not be liable for any costs associated with the program, including the feasibility study. It took two years for the board to raise the $1 million needed to research the program’s costs and impact.

Those findings were substantial.

According to figures from AARP, about 7.5 million Californians currently work for employers that do not offer a retirement plan and, according to Boyken, about 6.8 million Californians would be eligible for the state-run program.

According to the Employment Development Department, there were about 19.2 million workers in the civilian labor force, as of July.

“As you and I talk, there are approximately 7 million people in the state of California who have no employer-provided retirement plan whatsoever,” said Bill Sokol, a lawyer and expert in labor issues. Sokol serves on the Secure Choice Board as one of the governor’s appointees.

According to Sokol and Boyken, the fact that the state-run account would be automatic means a great deal in providing for those millions of private-sector employees who have no retirement plan. Figures from the Secure Choice feasibility study estimate that programs where employees ‘opt-in’ see participation rates of about 15 percent.

“While people should save for their post-employment years, government should not be in the business of mandating retirement savings.” — John Moorlach

If Gov. Brown signs the bill, employees would have the opportunity to initially invest up to 5 percent of their paycheck in a low-risk retirement fund, and the amount could increase to 8 percent over time, at the worker’s request. The program covers employers with more than five employees that don’t already offer retirement programs.

The workers’ contributions would be “low-risk and low-fee choices, representing the industry’s best practices for a sound retirement,” Chiang’s office said. “The Board will be required to maintain a balanced investment portfolio that provides assurance that no single investment or class of investments will have a disproportionate impact on the total portfolio.”

Many business interests were concerned about the burden of the program falling upon the private sector further down the line. The Employee Retirement Income and Security Act (ERISA) is the federal legislation that governs retirement plans provided by private sector employers. Without a guarantee from the federal government, businesses were unsure if ERISA and require employer management and costs.

Others were even more critical.

“While people should save for their post-employment years, government should not be in the business of mandating retirement savings,” state Sen. John Moorlach, an Orange County Republican, said in a written statement. “How will this proposal lead to long-term savings and “secure choice” when it is neither? While it is technically not a “pension” or a defined benefit program, it has been sold as a guaranteed return program with a defined benefit for private workers.”

But some concerns were eased when the U.S. Department of Labor last month that state-run plans would remain in a “safe harbor.” It was that decision in late August that got the amended bill through the Assembly. In addition, lawmakers included amendments that specified that employers would not give employees financial advice and would not be financially liable for employee retirement accounts.

The 3 percent payroll deduction default specified in the bill is conservative, not enough to provide for the retirement for many baby boomers.”

“We have done all that we could think of to limit employer liability,” said Marti Fisher, a policy advocate for the California Chamber of Commerce. She added that although the Chamber has dropped its opposition, it still is not in favor of the bill. The California Manufacturers and Technology Association likewise dropped its opposition for the same reasons, according to spokesman Gino DiCaro.

Meanwhile, the financial services sector still has concerns, as state-run retirement funds present major competition for their own private instruments of saving.

A statement released by the Financial Services Institute in response to the Department of Labor’s new rules suggested that state-run plans could reduce options in terms of private-sector plans and hold hidden costs.

Meanwhile, advocates are more concerned that SB 1234 is just the first step towards a solution. The 3 percent payroll deduction default specified in the bill is conservative, not enough to provide for the retirement for many baby boomers who are rapidly approaching age of retirement.

“If [employees] don’t do more than the default rate [of three percent], it will be more like a supplement,” Boyken said.“If you really want to change retirement savings there are probably federal solutions that can attack it better than state solutions.”

While baby boomers face a more impending need for retirement savings, millennials newer to the workforce are likely to see the benefits of reforms like SB 1234. Still, many believe there is more work to be done.

“My generation we thought everything will take care of itself,” Sokol said. “[Millennials are] acutely aware that this is an issue”