An unprecedented state law meant to create 401(k)-style retirement accounts for millions of private-sector workers in California now faces a daunting obstacle to ever being implemented: one of the most powerful federal laws on the books.

Under the state law establishing the California Secure Choice Retirement Savings Program, after it is phased in, all companies with five or more workers which do not have retirement benefits eventually would have to withhold 3 percent of worker pay and send it to the state government, with the funds to be invested in safe financial instruments such as U.S. treasuries. Workers could opt out.

The proposal was championed by state Senate President Kevin de León (pictured), D-Los Angeles, with strong support from state Treasurer John Chiang. They depicted it as crucial to helping 7 million Californians working in jobs without retirement benefits to prepare for retirement.

But the Republican-controlled Congress recently passed, and President Trump subsequently signed, a law overturning an order issued last August by the Obama administration’s Department of Labor that exempted Secure Choice-type programs from the Employee Retirement Income Security Act (ERISA), a landmark 1974 law that established strict standards for retirement plans and their management. This erased legal concerns raised by pension lawyers aware of ERISA’s intricacies.

Yet at a news conference last week, de León and Chiang downplayed the significance of the lost ERISA exemption. They said they had only sought the federal action in response to concerns raised by the California Chamber of Commerce and the California Manufacturers and Technology Association – not because of a concern that Secure Choice would be subject to ERISA.

That’s not the conclusion one would be likely to gather after reading the language of Senate Bill 1234, the de León bill establishing Secure Choice that was signed by Gov. Jerry Brown in September. It makes specific reference to the ERISA exemption: “The United States Department of Labor has finalized a regulation setting forth a safe harbor for savings arrangements established by states for nongovernmental employees for the purposes of the federal Employee Retirement Income Security Act.”

And it says the Secure Choice governing board “shall not implement the program … if it is determined that the program is an employee benefit plan under the federal Employee Retirement Income Security Act” – which it now appears to be.

ERISA expert notes scope of landmark 1974 law

However, de León and Chiang cited a 2016 opinion from the K&L Gates law firm that sees no ERISA compliance problem. But the opinion is based on an earlier version of the bill – not the measure that passed and seemed built on the assumption that Secure Choice was only legal with the ERISA exemption.

In a March analysis released as the bill to overturn the exemption was advancing through Congress, the National Public Pension Coalition’s program manager, Tyler Bond, suggested courts might rescue Secure Choice-type laws by deciding ERISA doesn’t apply. But Bond’s background is as a communications specialist, not the law.

Michael A. McKuin, a Palm Desert lawyer who specializes in ERISA, notes on his website the long history of courts broadly interpreting ERISA’s scope because of the law’s sweeping language: “The provisions of … this chapter shall supersede any and all state laws insofar as they may now or hereafter relate to any employee benefit plan.”

McKuin writes: “In determining whether a plan is governed by ERISA, courts have generally followed the approach of the Eleventh Circuit in Donovan v. Dillingham, 688 F.2d 1367 (11th Cir. 1982) (en banc). Under the Dillingham test, an ERISA plan exists if a reasonable person can ascertain: (1) the intended benefits, (2) intended beneficiaries, (3) the source of financing, and (4) the procedures for receiving benefits. … The purported plan need not be formal or written to qualify as an ERISA benefit plan, but rather, the court must look to the ‘surrounding circumstances’ to see if the four factors have been met.”

“As a practical matter, it does not take much to satisfy the test and Courts will generally find the existence of an ERISA plan even where no such plan is wanted by anyone,” McKuin writes – unless the plan has the “safe harbor” specifically mentioned in SB 1234’s ballot language.

The House of Representatives voted to axe California’s planned retirement savings program, throwing the future of it and similar efforts around the country into serious doubt.

“Despite a plea from California Gov. Jerry Brown, the state’s GOP representatives voted unanimously [last week] on a resolution to block California and other states from setting up 401-K-type plans for private-sector workers who lack retirement benefits – a measure that sailed through the U.S. House of Representatives on a party-line vote,” the San Jose Mercury News reported.

Because the Labor Department enacted rules designed to enable those plans to be formed late in former President Obama’s last term, lawmakers are able to act to undo them. “The House passed the resolutions largely along party lines under a legislative mechanism known as the Congressional Review Act, which allows Congress to kill regulations rolled out during the final months of the previous administration,” as the Wall Street Journal explained. 

California pleading

In a letter to the California congressional delegation, Gov. Brown had admitted the plan would direct money away from the financial services industry, but pled for the broader menu of retirement options he said it would provide. “Brown, who signed legislation last year establishing the ‘Secure Choice’ program, called the retirement savings opportunity modest, but important,” according to the Sacramento Bee. “He said the labor department issued its rule to ensure the retirement schemes were financially and legally sound. Efforts to wipe away the Obama administration regulations could spur legal challenges to state programs like the one in California, and imperil future moves to enact the benefit in other states.”

Secure Choice promised to offer “automatic payroll deductions for as many as 7 million low- and middle-income workers whose employers don’t offer 401-k plans or other benefits,” the Mercury news noted. “Illinois, Connecticut, Maryland and Oregon have passed similar initiatives.”

Risky choices

The party-line split on the controversy has sharpened a debate over the distribution of retirement costs fueled by challenges on both sides. Republican lawmakers oppose the prospect of even greater public pension problems nationwide, while Democrats argue that private-sector pensions no longer cover the needs of retired workers to the degree they did in a different economic era. “Studies show that employees are 15 times more likely to save for retirement if they have a plan at work. But roughly half of American workers, many of whom are employed by small businesses, don’t have access to one,” AARP noted in a review critical of the Republican position.

Some state governments, already troubled by the prospect of public pensions crises, have found themselves torn between risking a private sector retirement crisis on the one hand and a funding crisis for private sector employee pensions on the other. The posture of many state officials has suggested that struggling with the latter may seem to them to be the safer political bet. “Fifteen state treasurers, including Republicans in Indiana, Idaho, Utah and Louisiana, wrote Congress on Tuesday opposing the effort to roll back the Obama-era rule, which they said ‘provides important flexibility to states and large municipalities as they seek to address the growing retirement crisis facing this country,'” according to The Hill. “The National Conference of State Legislatures also urged Congress to keep the rule in place.” 

At the same time, powerful private-sector interests have lined up an in-depth defense against supporters of the state pension plans, driven not only by self-interest but a concern that states’ track records on public pensions do not inspire confidence in their ability to successfully manage a broad new expansion of retiree benefit management into the private sector. “If Congress rolls back the rule, it would likely open retirement programs run by states to legal challenges,” The Hill added. 

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.”

Through a legislative measure, signed into law by Gov. Jerry Brown on Thursday, most workers in the state who don’t have access to an employer-provided retirement plan will automatically join the Secure Choice Retirement Savings Trust through their work, although employees can opt out.

Senate President Pro Tempore Kevin de León, who championed the bill, argued that while anyone already has the option of enrolling in a private account, many are not. 

“With today’s action, California is providing workers a new chance to achieve better retirement security,” the Los Angeles Democrat said in a statement. “Secure Choice will empower younger generations, working families, and the women who lead them, and help provide the financial security they have earned for the later years of their life.”

Workers will be able to contribute to their account as much of their salaries as they choose, although the default will be 3 percent initially. The accounts will be held in mostly low-risk investments, like treasury bills, with a focus on long-term financial growth. 

The legislation also has provisions to block the state and employers from incurring any liabilities associated with the new program. However, critics are unconvinced that enough safeguards are in place.

“You can anticipate that this ‘secure’ investment has the potential to morph into a massive boondoggle and may become more expensive in meeting investor expectations during the inevitable next economic downturn,” said Sen. John Moorlach, R-Costa Mesa, a certified public accountant and certified financial planner. “SB1234 has no provision from using taxpayer funds to go towards a bail out.” 

The program would be administered by a nine-member California Secure Choice Retirement Savings Investment Board, which is chaired by the state treasurer.

According to a treasurer spokesman, the program will begin being phased in in three years, depending on the number of employees a business has, starting sometime in 2018.

Everyone is CA could have savings soon

Good morning. TGIF. As we trudge through the few days left in the legislative session, each day brings plenty of action. On Thursday, a savings-for-all plan passed the Assembly that, if signed into law, will automatically enroll many employees into a state-run individual retirement system.

Secure Choice would require employers of five or more people to automatically enroll employees into portable retirement accounts, with an opt-out clause for the individual.

Proponents of the measure say that while everyone already has the option of investing in a wide variety of retirement accounts, they aren’t — the approximately 7 million people in the state who don’t have employer-based retirement accounts need to be nudged into planning for the future.

CalWatchdog has more.

In other news:

• “In a dramatic public escalation of the political dispute over a bill to give farmworkers more overtime pay, the leader of the California Assembly vowed to laborers massed outside the legislative chamber Thursday that he would champion the issue after an expected vote failed to materialize,” writes The Sacramento Bee.
• “Bad news for ferret lovers: Your pet is still illegal in California. But change may be coming. On Thursday, the California Fish and Game Commission continued reconsideration of the ban on domestic ferrets that’s been in place since 1933 until its next meeting after staff has had time to review new documents.” CalWatchdog has more.
• “A measure to expand incentives for developers who agree to build low-income housing cleared the state Senate on Thursday. The bill from Assemblyman Richard Bloom, D-Santa Monica, strengthens the state’s rules requiring local governments to approve housing projects that allow developers to build at higher densities, have lower parking requirements or receive other concessions if they reserve a portion of their projects for low-income residents,” writes the Los Angeles Times.
• “The Santa Clara County judge who faces a recall threat for giving a light sentence to a Stanford student convicted of sexual assault will no longer handle criminal cases — at his own request,” reports The San Jose Mercury News. 

Assembly:

• Gone ’til Monday

Senate:

• In at 9 .m.

Gov. Brown:

• No public events announced.

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Secure Choice, if implemented, would require employers of five or more people to automatically enroll employees into portable retirement accounts, with an opt-out clause for the individual.

Proponents of the measure say that while everyone already has the option of investing in a wide variety of retirement accounts, they aren’t — the approximately 7 million people in the state who don’t have employer-based retirement accounts need to be nudged into planning for the future.

“This is a mechanism to get Californians to save for retirement,” Assemblyman Mike Gatto, D-Glendale, said on the floor Thursday, adding that while skeptical at first, he eventually asked himself why he hadn’t thought of the idea.

Others remained skeptical, with concerns over the risk to taxpayers if the market tanks and whether diligent contributors will end up subsidizing those who have not contributed much. 

“I applaud (Senate President Pro Tem Kevin de Leon) for authoring this bill … however, we have some real challenges in this bill,” said Assemblyman David Hadley, R-Torrance, who was a financial adviser prior to his election to the Assembly. “This bill has the makings of an epic problem.”

Gatto reiterated that the accounts are individualized with no risk to the state. Others have pointed out that the accounts will be built on low-risk investments like treasury bills and would lower the demand on Social Security — although critics have pointed that low-risk investments have a low return on investment, which could give account holders a false sense of security. 

The program, if signed into law, would be administered by a nine-member California Secure Choice Retirement Savings Investment Board, which is chaired by the state treasurer.

The measure heads back to the Senate next, where it sailed through earlier this year.

Secure Choice, if implemented, would require employers of five or more people to automatically enroll employees into portable retirement accounts, with an opt-out clause for the individual.

While everyone has the ability to go check-in-hand to invest in a retirement account at any time, proponents of the measure point to the fact that many are not. The theory behind the bill is that the approximately 7 million people in the state who don’t have employer-based retirement accounts need to be nudged into planning for the future.

The program would be administered by a nine-member California Secure Choice Retirement Savings Investment Board, which is chaired by the state treasurer.

On Monday, the board accepted recommendations based on a market analysis and feasibility study prepared by an outside vendor. The study was paid for with $1 million in private funds raised by Senate pro Tem Kevin de León of Los Angeles, the bill’s sponsor.

The study’s recommendations will be added to an amended version of the 2012 bill, which is to be heard in the Senate Public Employment and Retirement Committee by April 22.

Details

The plan is for the state to provide the opportunity for saving. There is no state contribution to the fund, so proponents say there is little to no risk to the state.

The state would incur administrative costs, but those would be covered by participant fees, according to Grant Boykin, deputy treasurer for retirement security and health care.

Businesses will not be required to offer financial advice about the plans, said Boykin. Instead, they will pass on information determined by the board and then set up payroll deductions.

“Education will be hugely important, but that will fall on the board,” Boykin said.

Behavioral economists contacted by de León advised that people are 15 times more likely to save once the account has been opened than if left to open an account on their own, according to Boykin.

De León conceded that there was an element of risk to the employees when investing in retirement funds, but he said that the types of investments would be relatively low-risk.

Opposition

When the initial measure passed in 2012, it was over the opposition of groups like Howard Jarvis Taxpayers Association, which opposed on the grounds that the private sector was already performing this service, and business groups, like the California Chamber of Commerce, which opposed largely on concerns of the impact on employers.

Key findings of the study

• “About 6.8 million workers are potentially eligible for the California Secure Choice Retirement Savings Program.”
• “Likely participation rates (70-90 percent) are sufficiently high to enable the program to achieve broad coverage well above the minimum threshold for financial sustainability.”
• “Eligible participants in California are equally comfortable with a 3 percent or 5 percent contribution rate. The vast majority of likely participants are also comfortable with auto-escalation in 1 percent increments up to 10 percent.”
• “To start, the program should offer a default investment option consisting of a diversified portfolio with long-term growth potential and the choice to opt into a low-risk investment.”