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California's recently mandated employee retirement plan -- should small business employees opt out or opt in?

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Our company (a small California based business) recently received a newsletter from a law firm we have worked with alerting their current clients to the upcoming employer and employee requirements of The Secure Choice Act, which was recently enacted by California's legislature.  Governor Brown signed Senate Bill 1234 (California Secure Choice Retirement Savings Trust Act), which became effective January 1, 2017.   

According to the newsletter, employers with five or more employees must either provide their employees with an employer sponsored retirement savings plan or participate in the Secure Choice program, which is a pension fund to be set up and run by a government appointed board in California.  All eligible employees will automatically be enrolled in the program UNLESS they opt out.   The program, which is in process of being set up,  will be open for enrollment in late 2018 or early 2019.

What are the thoughts and/or recommendations by knowledgeable FW contributors?


Here are a couple of sites discussing the issue for those who may not have heard about this law previously:

Sacramento Bee newspaper site :
Below is an excerpt from Sacramento Bee newspaper for ease of reference:

"Congressional Republicans are moving to eliminate Obama administration labor regulations that helped California establish its Secure Choice program, a landmark effort to automatically enroll millions of private-sector workers without retirement plans in a state-run savings account."
 

Cal Pensions site 
Below is an excerpt snapshot of the Cal Pensions site  for ease of reference:

"California and a half dozen other states are creating state-run “automatic IRAs” for employees with jobs that do not offer a retirement plan. If employees do not opt out, a payroll deduction will go into their new tax-deferred savings account."


ETA:  The topic title was edited after original post to more accurately reflect the subject issue.




 

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rated:
5 employees in 2019, 100 employees by 2018

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bighitter said:   According to the newsletter, employers with five or more employees must either provide their employees with an employer sponsored retirement savings plan or participate in the Secure Choice program, which is a pension fund to be set up and run by a government appointed board in California.  All eligible employees will automatically be enrolled in the program UNLESS they opt out.   The program, which is in process of being set up,  will be open for enrollment in late 2018 or early 2019.

What are the thoughts and/or recommendations by knowledgeable FW contributors?
 

  As long as there is no incentive from the employer (e.g., money kicked in by the employer on your behalf) to participate in either plan, one they setup or the secure choice program, I dont see much value here.

If you are just starting out, simply open one with say Vanguard, invest in one or more MFs (Target date funds to keep it simple) and call it a day.

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Just keep an eye on the US Congress which is trying to kill such legislation. The previous administration with the US Congress passed enabling legislation for this. The current administration and many in the current US Congress are working to reverse that making such acts illegal.. I have been reading about that on AARP twitter postings with links.

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If you run a business, wait and see what happens.  Congress rolled back the Dept of Labor rule to exempt state run retirement plans from ERISA regulations, and the Dept of Labor may hinder state run retirement plans further.

I googled to catch up on the latest and this seems like a good summary of how we got here and what to know:
http://www.truckerhuss.com/2017/06/california-to-move-forward-wi...

Personally I think the program looks terrible.  Every worker already has access to the IRA retirement savings vehicle and can choose to use it if they really want to.  No account fee IRAs with low fee investments options exist in the private marketplace (index funds at Vanguard, Schwab, Fidelity, etc).  Mandating / auto-enrolling IRAs for those who cannot afford retirement savings (those who regularly will tap the IRA account for early withdrawals) will create unnecessary transaction costs all around:  early withdrawals have a 10% penalty, extra paperwork to file taxes or uneducated workers don't file the IRA 1099-R and have to deal with the IRS demand letter later.

If CA also decides to offer a guaranteed return option, I would bet that the program will eventually need a taxpayer bailout.  Looking at how underfunded CalPERS and CalSTRS is, I wouldn't be surprised if CA overpays/inflates returns during good times, and calls for a bailout when the economy/markets take a hit.  I know the program states it will be self-sufficient and not need any taxpayer money besides stand up costs... but how often has the CA legislature kept moving the line once they got their foot in the door on something?

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So your question is whether or not your employees should participate in the CA "Secure Choice" plan that you'll be setting up for them?

Its up to them isn't it?

Whether or not its a good choice will depend on their individual circumstances.

rated:
Found this bit:
http://www.treasurer.ca.gov/scib/employees.asp
"For up to the first three years of the program, the Board will establish managed accounts invested in U.S. Treasuries, or similarly low-risk investments. "

At least initially the investments will be safe. Not much worry of CA f'ing it up. But not much gains on returns either.

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Of interest to employers:

-- California's Employment Development Department will have the authority to assess penalties for non-compliance against the employer of $250 per employee for non-compliance and that penalty can increase to $500 per employee.  There is no indication whether the penalties can be re-assessed annually at each open enrollment period.

-- The information packets that the employer must distribute to employees won't be mailed out by the State of California.  The employer will be responsible for downloading the packets from the Employment Development Dept's website and distributing to all employees.

-- Haven't been able to determine whether part-time employees, new hires, etc. are considered "eligible" employees under the Secure Choice Program.

--  The Secure Choice Act was exempted during 2016 from ERISA requirements


 

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bighitter said:   ....
Cal Pensions site 
 

Looking our for #1:

"State retirement plans are strongly backed by some public employee unions, who think improving private-sector retirement can help counter pressure to cut government pensions or switch to 401(k)-style individual investment plans, following the corporate trend."

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I established SEP-IRAs for my employees. No required filings and one deposit per employee per year. Although we fund the maximum allowable amount for each employee every year regardless of length of service or hours worked, we could have excluded part-time and new employees and made little or no contributions to eligible employees. Setting up something similar should eliminate any potential fines in CA. 

rated:
Jahlapenoez said:   If you run a business, wait and see what happens.  Congress rolled back the Dept of Labor rule to exempt state run retirement plans from ERISA regulations, and the Dept of Labor may hinder state run retirement plans further.

I googled to catch up on the latest and this seems like a good summary of how we got here and what to know:
http://www.truckerhuss.com/2017/06/california-to-move-forward-wi... 

Personally I think the program looks terrible.  Every worker already has access to the IRA retirement savings vehicle and can choose to use it if they really want to.  No account fee IRAs with low fee investments options exist in the private marketplace (index funds at Vanguard, Schwab, Fidelity, etc).  Mandating / auto-enrolling IRAs for those who cannot afford retirement savings (those who regularly will tap the IRA account for early withdrawals) will create unnecessary transaction costs all around:  early withdrawals have a 10% penalty, extra paperwork to file taxes or uneducated workers don't file the IRA 1099-R and have to deal with the IRS demand letter later.

If CA also decides to offer a guaranteed return option, I would bet that the program will eventually need a taxpayer bailout.  Looking at how underfunded CalPERS and CalSTRS is, I wouldn't be surprised if CA overpays/inflates returns during good times, and calls for a bailout when the economy/markets take a hit.  I know the program states it will be self-sufficient and not need any taxpayer money besides stand up costs... but how often has the CA legislature kept moving the line once they got their foot in the door on something?

  
This.  Unless you are close to retirement I would not put a whole lot of faith in the solvency of state pensions.  Especially ones in certain states, CA being one of them.  The underfunded gap will only continue to grow as the expected rate of return continues to be missed due to the need for pensions to hold a fair amount in fixed income during a low interest rate environment.  

The Feds can print money.  What will state's do?  Raise taxes?  They could, and people will likely move.  That leaves the option of pensioners taking a haircut. 

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Example of how costly mismanaged state investment plans can be:
http://www.calstrs.com/news-release/new-legislation-stabilizes-calstrs-funding
Employer contributions currently at 8.25 percent will increase gradually by an additional 10.85 percent phased in over the next seven years, for an eventual total of 19.1 percent. State contribution rates, which are currently 5.541 percent, when the contributions for purchasing power protection are included, will increase over the next three years to a total of 8.828 percent by fiscal year 2016-17. 

I guess "stabilizes" is the terminology for state pension plans but "bailout" is for Wall Street.  All the same to taxpayers who are footing the bill since the "employers" of teachers are schools funded by taxpayers.
 

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To the extent that we have 70's style inflation, that will really devalue fixed value pensions. As far as the mandated retirement plan, I would just offer my employees the official Treasury MYRA rather than the state's separate plan. The MYRA is invested in the G fund which will pay better than the treasuries the state has access to. The earliest this would be implemented would be 2019, and knowing state IT systems it likely will be delayed until 2020. 

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People are talking about pensions. This program isn't a defined benefit plan like state pensions. It operates as an IRA. And the IRA is not even administered by the state:


mission statement from : http://www.treasurer.ca.gov/scib/index.asp
"To promote greater retirement savings for California’s private-sector workers who currently lack access to employer-sponsored retirement plans by providing access to a voluntary, low-risk, low-cost, portable retirement savings plan that enables direct payroll contributions into a personal Individual Retirement Account (IRA) managed by a private-sector financial firm overseen by the Secure Choice Board."

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Ya, facepalm time. People read the word "pension" then the OMG all pension will go bankrupt switch got triggered.

I actually have both, one defined benefit plan from a prior employment and one defined contribution plan from my current employment. The defined contribution plan works more or less like a IRA/401k where a part of the pay (either from employee or employer) goes into a stable investment account managed by outside firm. I'm not counting on getting my defined benefit at all, since I might not even be around then or the company could be gone.

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Am aware the vehicle is an IRA. Concern is with their plan to develop managed investments that share risk / smooth market losses. Pension mention is just an example of what has happened when govt is managing investments.

http://www.treasurer.ca.gov/scib/fact.pdf


SAFE.
For up to the first three years of the program, the Board would establish managed accounts invested in U.S. Treasuries, or similarly low-risk investment, and develop investment options that address risk-sharing and smoothing of market losses and gains. Participant fees would be low. The Board, and its relevant contractors, would have a fiduciary duty to the participants of the program.

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jerosen said:   People are talking about pensions. This program isn't a defined benefit plan like state pensions. It operates as an IRA. And the IRA is not even administered by the state:


mission statement from : http://www.treasurer.ca.gov/scib/index.asp 
"To promote greater retirement savings for California’s private-sector workers who currently lack access to employer-sponsored retirement plans by providing access to a voluntary, low-risk, low-cost, portable retirement savings plan that enables direct payroll contributions into a personal Individual Retirement Account (IRA) managed by a private-sector financial firm overseen by the Secure Choice Board."

  
As you say, it is definitely not a defined benefit plan like the state employees pension plan.  

Quote below from California Secure Choice fact sheet:  While the fact sheet describes the plan as "voluntary," the employee must choose to OPT out.   

CHAPTER 804 (CA STATUTES 2016) A voluntary workplace retirement savings plan that enables participation through employee payroll contributions into a personal retirement account managed by the California Secure Choice Retirement Savings Investment Board.

WHAT SECURE CHOICE WOULD MEAN FOR EMPLOYEES: • SIMPLE. Payroll contribution of 3% of salary into a personal retirement plan, with the option to change contributions at any time. Escalation of contribution rates up to 8% of salary with participant ability to stop or change the rate


• SAFE. For up to the first three years of the program, the Board would establish managed accounts invested in U.S. Treasuries, or similarly low-risk investment, and develop investment options that address risk-sharing and smoothing of market losses and gains. Participant fees would be low. The Board, and its relevant contractors, would have a fiduciary duty to the participants of the program. •

PORTABLE. Employees can contribute to their account throughout their working life.

Applies to employers, with 5 or more employees, who do not offer an employer sponsored retirement plan. These employers will be required to offer an employer sponsored retirement plan, or provide their employees with access to California’s Secure Choice Retirement Program. 


Link to the Fact Sheet:    http://www.treasurer.ca.gov/scib/fact.pdf 
 

rated:
bighitter said:   Our company (a small California based business) recently received a newsletter from a law firm we have worked with alerting their current clients to the upcoming employer and employee requirements of The Secure Choice Act, which was recently enacted by California's legislature.  Governor Brown signed Senate Bill 1234 (California Secure Choice Retirement Savings Trust Act), which became effective January 1, 2017.   

According to the newsletter, employers with five or more employees must either provide their employees with an employer sponsored retirement savings plan or participate in the Secure Choice program, which is a pension fund to be set up and run by a government appointed board in California.  All eligible employees will automatically be enrolled in the program UNLESS they opt out.   The program, which is in process of being set up,  will be open for enrollment in late 2018 or early 2019.

What are the thoughts and/or recommendations by knowledgeable FW contributors?


Here are a couple of sites discussing the issue for those who may not have heard about this law previously:

Sacramento Bee newspaper site :
Below is an excerpt from Sacramento Bee newspaper for ease of reference:

"Congressional Republicans are moving to eliminate Obama administration labor regulations that helped California establish its Secure Choice program, a landmark effort to automatically enroll millions of private-sector workers without retirement plans in a state-run savings account."
 

Cal Pensions site 
Below is an excerpt snapshot of the Cal Pensions site  for ease of reference:

"California and a half dozen other states are creating state-run “automatic IRAs” for employees with jobs that do not offer a retirement plan. If employees do not opt out, a payroll deduction will go into their new tax-deferred savings account."


ETA:  The topic title was edited after original post to more accurately reflect the subject issue.




 

  
So is this a state run pension plan? Or something like a 401k?

Because pension requires some type of guaranteed payment ... which i'm not sure who will put up the money if there is not enough money to pay out the benefit.
401K type account on other hand - has no guaranteed return, and  you can chose/change asset allocation.

 

rated:
Its a mandated (except if opting out) IRA, with plans to develop investment options that provide a guaranteed rate of return via managed portfolios/investments by the state (or contracted out).

rated:
Jahlapenoez said:   Its a mandated (except if opting out) IRA, with plans to develop investment options that provide a guaranteed rate of return via managed portfolios/investments by the state (or contracted out).
  
California's two public pension funds (Calpers) and Calstrs (teachers) have had poor performance.  According to Pensions & Investments August 2016 article, "Between a rock and a hard place -Dismal returns, poor projections push public plans to pare investment gain expectations"

      CalPERS earned 0.6% in its most recent fiscal year, while CalSTRS did slightly better at 1.4%; both significantly underperformed their 7.5% return assumptions.

Link:  http://www.pionline.com/article/20160822/PRINT/308229981/between-a-rock-and-a-hard-place 


 

rated:
bighitter said:   
Jahlapenoez said:   Its a mandated (except if opting out) IRA, with plans to develop investment options that provide a guaranteed rate of return via managed portfolios/investments by the state (or contracted out).
  
California's two public pension funds (Calpers) and Calstrs (teachers) have had poor performance.  According to Pensions & Investments August 2016 article, "Between a rock and a hard place -Dismal returns, poor projections push public plans to pare investment gain expectations"

      CalPERS earned 0.6% in its most recent fiscal year, while CalSTRS did slightly better at 1.4%; both significantly underperformed their 7.5% return assumptions.

Link:  http://www.pionline.com/article/20160822/PRINT/308229981/between-a-rock-and-a-hard-place 


 

  

Remains to be seen how  it is operated.    

Might just end up similar to whats in the 529's like the fixed return option for CA's 529 : 

https://www.scholarshare.com/research/guaranteed.shtml

 

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