SACRAMENTO — Faced with a possible epidemic of poverty-stricken seniors, California is poised to launch an ambitious program to enroll nearly 7 million low- and middle-income workers who lack pensions or 401(k)s in new state-directed retirement funds.
The Legislature is putting the finishing touches on the California Secure Choice Retirement Savings Program, which would provide millions of hotel, restaurant, manufacturing, farm and other private-sector employees — a group that is mostly under age 40 and nearly half Latino — with an easy way to funnel a portion of their earnings into an individual retirement account.
Senate President Pro Tem Kevin de León, who has spearheaded the initiative, called it the biggest expansion of retirement security programs since the New Deal era. California is the largest of eight states in the process of enacting some form of retirement program for private-sector employees.
“We have a retirement insecurity crisis, and what’s looming on the horizon is a retirement tsunami,” said de León, D-Los Angeles. “This will not be the panacea to all retirement insecurity anxieties, but it is a big leap forward.”
The bill, SB 1234, is expected to get final approval by the Senate this week and head to the desk of Gov. Jerry Brown, who has not publicly indicated whether he will sign it.
California and the rest of the country are in the middle of a wrenching transition away from the days when most workers could count on a comfortable retirement. Roughly 55 percent of private-sector employees in California between the ages of 18 and 64 do not have access to a workplace retirement plan. The typical working-class household in America has just $2,500 saved for retirement, according to the National Institute on Retirement Security.
“We are really looking at each generation retiring poorer than the last,” said Nari Rhee, manager of the Retirement Security Program at the UC Berkeley Center for Labor Research and Education. “What states and the federal government are confronting is not just an aging population but the fact that people are going to be retiring poorer and poorer and more in need of government resources.”
Secure Choice, which has been in development since 2012, would begin to address that problem by automatically signing up roughly 6.8 million Californians and diverting 3 percent of their earnings into the new accounts. The program would be phased in over three years. Those who don’t want to participate could opt out.
The state would loan Secure Choice up to $134 million in startup funds, but otherwise taxpayers would not underwrite the program, backers of the initiative say. The law would apply only to companies with five or more employees.
For the first three years, the accounts would invest in safe, low-yield U.S. Treasury notes. The next steps would be determined by an investment board overseeing the program.
Rhee, who helped conduct the research behind Secure Choice, said the accounts would likely shift to diversified portfolios of stocks and bonds. The default structure would probably be a Roth IRA, a model that allows account holders to make tax-free withdrawals upon retirement, she said. “The goal is to make saving for retirement automatic and easy for people who don’t have access to that right now,” Rhee said, adding that the program would offer a “streamlined, low-cost investment menu managed by the state under fiduciary standards.”
But just how strict would those standards be?
To protect business owners from legal liability, Secure Choice backers won an exemption for the program from the federal Employee Retirement Income Security Act of 1974. That could leave account holders vulnerable, said Brian Reid, chief economist for the Washington, D.C.-based Investment Company Institute, which advocates for mutual funds and investment advisers.
The institute is also skeptical of the state’s claim that Secure Choice has been written in such a way as to protect the government from liability for benefit payments, and the institute has raised concerns about the fees charged to participants.
Secure Choice aims to keep fees at 1 percent for the first six years or so and then reduce them significantly as the program matures. But, Reid said, that’s not a sure thing.
“We think that the economic assumptions the state of California has used are overly optimistic and that the participants are going to end up paying a lot more in fees than what the state is projecting,” he said.
Blanca Castro, director of advocacy for AARP California, said the law has been meticulously crafted — “This is not something that just happened overnight” — and is backed by a study that found 70 percent or more of eligible employees would be likely to take advantage of the program.
Most people without employer-provided accounts want to invest in a retirement fund, but many are intimidated by the prospect of finding one on the open market, according to the study, conducted by New York-based Overture Financial LLC and a host of partners. Making the process automatic should remove that barrier, Secure Choice backers claim.
But many low-wage earners either don’t have enough money to set aside or are forced to raid their accounts when misfortune strikes. The median income of those eligible for Secure Choice is about $25,000, according to UC Berkeley’s Rhee.
Jan Masaoka, CEO of the California Association of Nonprofits, which has endorsed Secure Choice, lauded the initiative but worried it likely won’t do much for the poorest of the poor.
“If people have to choose between their prescription medications and their Secure Choice account, they’re going to choose their prescription medications,” she said.
Blanca Rodriguez, of San Jose, works about 60 hours a week at two jobs, one at McDonald’s and the other at a 76 gas station. She lives paycheck-to-paycheck and hasn’t been able to save anything for retirement.
“I worry that when I retire I’m not going to have enough money to pay my rent, and I worry about my health,” said Rodriguez, 41.
She said she supports Secure Choice and hopes to begin setting aside some money as the minimum wage increases to $15 an hour over the next five years.
Castro, of the AARP, said the program will at least provide an option that wasn’t there before.
Added Castro: “This is a first step in terms of allowing millions of people the choice to save for retirement and starting to create a culture and generations of savers.”
Contact Aaron Kinney at 650-348-4357. Follow him at Twitter.com/kinneytimes.
