Private firms eye state-run pension savings plans

A board working on a proposal to enroll most small business employees in a state-run retirement savings plan, unless they opt out, was told last week that small technology-focused financial firms could do the job.

The founders of three firms that offer 401(k)s and other retirement plans to small businesses did not object to competition from the state. They offered their services, acknowledging that several small firms may be needed due to the size of the job.

There is a growing number of small firms using modern computer technology to offer small businesses retirement plans with lower cost and more service.

“We’ve got the systems, the people to support this type of an initiative, and we are all excited,” said Pete Kirtland of Aspire Financial Services. “Whether or not we participate, it’s the right thing to do.”

Chad Parks of Ubiquity added: “You are looking at three companies here who have decided to tackle this problem. So, there are people out there who are willing and able to do this.”

Michael Kiley of Plan Administrators Inc. replied when asked about obstacles: “You could do a lot of damage in the design. You could make every one of us run away if you don’t involve us.”

The three firms at a Secure Choice board meeting last week are part of a growing number of small firms using modern computer technology to offer small businesses retirement plans with lower cost and more service, the New York Times reported in September.

Large traditional financial firms are said to often have higher costs because, among other things, they tend to focus on selling investment funds and to have outdated technology designed to serve a few employers with many employees.

There is growing concern that many private-sector workers have little more than Social Security.

The Secure Choice program was created to provide a job-based retirement savings plan for about 6.3 million California workers without access to one. Only 45 percent of workers age 25 to 64 have an employer plan, less than the 53 percent national average.

An “automatic IRA” or payroll deduction that puts money into a tax-deferred account, unless a worker opts out, is said to be a proven way to boost savings. There is growing concern that many private-sector workers have little more than Social Security.

“The lack of plans is fueling a retirement-savings crisis,” a Bloomberg news story said this month. “Few workers save anything outside of employer-sponsored plans. Only 8 percent of taxpayers eligible to set aside money in an IRA or Roth IRA did so in 2010, according to the IRS.”

Even big companies are concerned that employees aren’t saving enough. Google, Credit Suisse, Apache and others have begun automatically diverting more than the standard 3 percent of pay into 401(k) plans, the Wall Street Journal reported last month.

In Washington, D.C., there were two well-publicized meetings last month on the need for more private-sector retirement saving.

The Bipartisan Policy Center held a one-day conference on whether “technology, new business models, and different plan designs” could boost retirement savings, including for workers who have a job-based retirement plan but aren’t saving enough.

Sen. Kevin de Leon pushed a Secure Choice bill through the Legislature despite opposition from Republicans and employer, insurer, financial planner and taxpayer groups.

The U.S. Chamber of Commerce and other groups told a Congressional panel that “multiple-employer plans,” perhaps offered by state chambers and trade associations, could cut costs and ease administration, allowing more businesses to offer retirement plans.

President Obama made several unheeded calls on Congress to create an “automatic IRA” before launching “MyRA” last year, a paycheck-deduction bond savings program that is off to a slow start.

After years of trying, Sen. Kevin de Leon pushed a Secure Choice bill through the Legislature (SB 1234 in 2012) despite opposition from Republicans and employer, insurer, financial planner and taxpayer groups.

But Secure Choice must run an obstacle course: a legal and market analysis not paid for by the state, approval for IRA-like tax treatment, exemption from a federal pension law (ERISA), a self-sustaining plan, and final legislative approval.

With a $500,000 matching grant from the Laura and John Arnold Foundation (vilified by public unions for pushing pension reform), Secure Choice raised $1 million and hired Overture to do the market analysis and K&L Gates for the legal analysis.

The U.S. Labor department has not yet ruled on the ERISA exemption. Labor Secretary Tom Perez also is working on a contested “fiduciary” rule for brokers and financial advisers requiring them to act in the best interest of small business customers.

State Treasurer John Chiang is aiding Secure Choice with staff support, meetings with business groups around the state, and urging federal action during two trips to Washington, D.C.

Memo: The employer should not be given the burden of educating employees about the program.

De Leon, who became the Senate leader last year, is now in a stronger position to get final approval of a Secure Choice plan. Public employee unions support plans that would help close the gap between private-sector retirement and government pensions.

Yvonne Walker, president of the largest state worker union, SEIU Local 1000, is a member of the Secure Choice board. She joined Jon Hamm, Highway Patrol union executive, in a proposal at a legislative hearing in 2011 on Gov. Brown’s pension reform.

Look at ways to improve retirement security for private-sector workers, the two union officials told lawmakers, instead of only focusing on cutting public employee retirement benefits.

The California Chamber of Commerce and the California Manufacturers and Technology Association reminded the Secure Choice board in September that they only lifted their opposition to allow a feasibility study.

Among a long list of concerns in their four-page memo: The employer cannot bear the risk for employee investments or decisions or for an under-funded program, and the employer should not be given the burden of educating employees about the program.

“The market analysis has revealed that the target market for this program includes individuals who are risk averse and lack basic investment knowledge,” said the business groups. “The research suggests that the biggest challenge to the program will be positioning and explaining the investment options to potential users.”

The Secure Choice board was told last week that when employers with five or more employees are told that they have to offer employees a retirement plan, some may choose an alternative to Secure Choice such as an IRA or Simplified Employee Pension.

The discussion briefly turned to competing with brand names, lower-cost products and “adverse selection” if Secure Choice ends up with only employers ignored by the aggressive marketers.

“If in fact your desire is just to make sure that these 7 million people are covered,” said Kiley of Plan Administrators Inc., “candidly the day you put the mandate out you don’t have to do anything further. They will be covered. The market will see to it.”
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Ed’s Note: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.