The law has several provisions protecting the state (and employers, which are required to enroll employees into Secure Choice) against liability, including this one: 

“The state shall not have any liability for the payment of the retirement savings benefit earned by program participants pursuant to this title. The state, and any of the funds of the state, shall have no obligation for payment of the benefits arising from this title.”

To protect against losses, the state plans to invest in low-risk securities, like treasury bonds or the federal MyRA program, while another section in the law allows for the state to adopt recommendations that address “risk-sharing and smoothing of market losses and gains.”

“Investment option recommendations may include, but are not limited to, the creation of a reserve fund or the establishment of customized investment products. Implementation of an investment option recommendation pursuant to this subparagraph shall be contingent upon subsequent approval by the Legislature.”

What does that mean?

If enacted, a reserve fund could protect investments during years of low returns, according to a Secure Choice official. In years the market performs well, the board could pay out less than the actual realized return. The remainder would be used to fill a reserve fund, which in turn could increase payouts in years the market performs poorly.

“Any reserve fund would have to be funded by participants themselves and not by the state,” according to Grant Boyken, deputy treasurer for retirement security and health care with the state Treasurer’s office. “The state can have no liability.”

Boyken reiterated that the Secure Choice Board has not made any decisions yet and is still considering many options. But it’s the ambiguity that leaves some observers concerned. 

Devil in the details

“Enabling more people to engage in retirement planning benefits them, society and government budgets,” said Carson Bruno, a research fellow with the Hoover Institution at Stanford University. “The devil, however, is in the details and how it is implemented.”

Bruno referenced the state’s pension crisis, where taxpayers are on the hook for $5.4 billion this year alone. Over the years, one big tweak, SB400, plus many minor tweaks, exacerbated the funding gap, despite claims that taxpayers would be protected.

“Secure Choice today isn’t a financial threat to taxpayers, but that doesn’t necessarily mean that future (lawmakers) won’t make it one tomorrow,” Bruno said. “Sacramento should work to ensure Secure Choice has strong protections built in – that can’t be tampered with by future lawmakers – to prevent it from becoming the next CalPERS or CalSTRS.”  

Heard this before

Those concerns have been most consistently echoed by Sen. John Moorlach, R-Costa Mesa, who notably predicted Orange County’s 1994 bankruptcy, which was largely prompted by risky investments made by the then-treasurer-tax collector.

Moorlach, a trained certified public account and certified financial planner, has repeatedly argued that it’s not a core mission of government to encourage savings by requiring employers to automatically enroll employees and set aside their wages.

Moorlach told CalWatchdog in a recent interview that whenever future economic downturns hit, producing low returns or worse, lawmakers may not be able to resist the temptation to try to fix the problem.

“They have this funny sense of guilt that if they don’t make up losses they’re somehow responsible for this,” Moorlach said.

The MyRA program is one of a few possibilities being considered by the California Secure Choice Retirement Savings Investment Board, along with Treasury securities, to be used for up to three years as the state’s program develops.

Last month, Gov. Jerry Brown signed Secure Choice into law, which will automatically enroll Californians who lack access to employer-provided retirement plans in the state-sponsored Secure Choice Retirement Savings Trust, unless they opt-out.

It’s estimated that around seven million Californians would be eligible for the program, and while the law doesn’t go into effect until January 2017, it’s expected to take a few years to work out the details. 

In the interim, the nine-member California Secure Choice Retirement Savings Investment Board, which is chaired by the state treasurer, is considering using the federal government’s MyRA program.

MyRA

During the 2014 State of the Union address, Obama introduced MyRA as a low-risk, low-return, starter investment account. The program was launched last year, but has since only enrolled 15,000 accounts nationwide, according to Reuters.

California is expecting to have 1.6 million participants in its first year, worth $3 billion in assets, making this a massive expansion of MyRA — if that’s the option the Secure Choice Board pursues.  

MyRA is similar to Secure Choice in theory, both would likely be Roth IRAs in low-risk investments with no outside contributions.

But there are some major differences. Secure Choice is automatic, MyRA is not. MyRA also has a $15,000 cap while Secure Choice has no limit. Once that limit is reached, the individual is encouraged to transfer to a private account. MyRA is meant to be temporary — a starter plan. Secure Choice is not. 

“Secure Choice accounts will have no limits other than the contribution limits for Individual Retirement Accounts that already exist in the Internal Revenue Code,” said Grant Boyken, deputy treasurer for retirement security and health care. “Secure Choice accounts are intended to be portable and to potentially follow workers from job to job throughout their career.”