State Sen. Kevin De Leon (D-Los Angeles) called the law an important step… (Rich Pedroncelli, Associated…)
SACRAMENTO — A new law that seeks to establish a first-of-its-kind state-run retirement plan for low-income workers still faces numerous hurdles in the year ahead, but its author says the idea is already generating nationwide attention.
SB 1234 by state Sen. Kevin De Leon (D-Los Angeles), signed into law last week by Gov. Jerry Brown, creates a California Secure Choice Retirement Savings Trust, authorizes a major feasibility study of the idea and seeks approval for the idea from federal regulators.
As envisioned by De Leon, the plan would require private employers to withhold about 3% of the wages of employees who participate. The state would collect the money, invest it and eventually provide a modest sum to retirees who don't have traditional company pensions or 401(k) retirement plans.
But, under a compromise that led to final approval of the legislation, the retirement program cannot begin operation until it gets a final go-ahead. Once a market analysis study is complete and federal officials sign off on the plan, lawmakers must pass another bill specifically authorizing the program.
The new law is an important first step toward preventing a tidal wave of "discarded seniors" forced to retire with little savings or income after lifetimes of often difficult manual labor, De Leon said.
The state senator said he had already conferred with U.S. Labor Secretary Hilda Solis, a former California legislator and U.S. representative from Los Angeles. The retirement plan also has sparked interest from officials in New York state, Pennsylvania and Connecticut, De Leon said.
The bill "is definitely getting quite a bit of attention" from the national leadership of the AFL-CIO and other unions, said Steve Smith, spokesman for the California Labor Federation, a prime supporter of De Leon's proposal.
"It's really trying to address a problem that very few people are trying to address in this economy: the real retirement crisis. Here in California, as many as half the workers retire in poverty" with only Social Security benefits to sustain them, he said.
The bill creates a seven-person oversight board that includes the state treasurer, director of finance and controller. The governor would appoint two individuals with expertise in retirement plans and small business; the speaker of the Assembly and the Senate president would make one appointment each.
The board would contract with experts to conduct the market analysis using private or federal funds and would pursue the project only if it concludes that the retirement system would be self sustaining.
The proposal also needs to be vetted by the U.S. Department of Labor to make sure the California law is not preempted by a federal employee benefits law known as ERISA, De Leon said. The Internal Revenue Service also would have to rule that contributions to the retirement plan could be made on a pre-tax basis.
"If we get the three major tests passed, then approval from the Legislature will not be that difficult," De Leon said.
Contributions by employees — plus any voluntary ones made by their employers — would be deposited in privately managed, low-risk individual retirement accounts that would be backed by insurance products, such as annuities.
According to a recent study by the UC Berkeley Labor Center, 55% of California private-sector employees ages 25 to 64 did not work for an employer that sponsored some type of retirement plan. The trend has been growing over the last decade, the study said.
As planned now, the retirement trust is expected to collect and invest an estimated $7 billion in contributions from the paychecks of more than 6 million mostly low-wage earners during its first year of operation. Administrative costs would be limited to 1% of total assets.
Neither the state nor the employers that participate in the plan would be held liable for the success of the investments that pay for the retirement benefits.
An earlier version of De Leon's bill encountered strong opposition from the California Chamber of Commerce and the financial industry. The opponents argued that the original concept duplicated retirement investment and savings plans that were already available from banks, brokers and other financial institutions.
What's more, the chamber contended that the state's finances are too precarious to take on such a massive new obligation. The chamber dropped its opposition once De Leon agreed to seek approval from the lawmakers and governor before moving the retirement plan from a proposal to a reality.