It’s been nearly six months since California Gov. Jerry Brown signed into law that state’s landmark auto-IRA legislation, the California Secure Choice Savings Trust Act (SB 1234). (Judy Miller, ASPPA’s Director of Retirement Policy, wrote about SB 1234 here.)
Over that time, it’s become evident that the legislation is becoming something of a de facto model for other states seeking to expand the availability of retirement savings vehicles, including workplace plans. It’s also become evident that there is widespread confusion about what the law requires. So let’s take a closer look at the law’s key provisions and implementation plans.
The law requires all non-governmental California employers with five or more employees to make workplace retirement savings available to employees. Workplace retirement savings could be any type of employer-sponsored program, from a defined benefit or 401(k)-type plan to an automatic payroll-deduction IRA arrangement. A “Retirement Investments Clearinghouse,” funded by interested vendors, will be made available on the program’s website to provide information on registered vendors, and the types of employer-sponsored retirement savings plans that are available to employers.
Once the program is in place, employers with five or more employees who have not chosen to offer another retirement program through a private provider would automatically enroll employees in a default state-sponsored payroll-deduction retirement savings program called the California Secure Choice Retirement Savings Program (CSCRS), withholding 3% of pay and forwarding these contributions to the state-run program for investment.
The CSCRS Investment Board could adjust the default withholding amount from 2%-4%. Employees who opt out will have to be re-enrolled every two years, and but can choose to opt out again. Employers with fewer than five employees could choose to participate in the program, but would not be required to do so. The bill makes it clear that at any time, any employer can choose to set up a retirement plan with a private provider and stop withholding contributions for the state program.
The law explicitly requires the CSCRS program to be IRAs, and not to be an employee benefit plan under ERISA. Employers are to have no responsibility or liability other than to withhold contributions from employees’ pay and forward the contributions on for investment. The accounts are to have a guaranteed rate of return, declared in advance of the year, and distributions are to be made in the form of lifetime income based on accumulated account balance at retirement. The value of the accounts and the lifetime income payments are not to be guaranteed by the state — the program must privately insure the risks associated with the program’s guarantees.
The first step toward implementation of SB 1234 is to secure non-state government funds for a market analysis to determine if the program can be self-sustaining. When the study is completed, assuming the conclusion is that the program should go forward, the design of the default program can begin. This phase presumably will include getting commitments from vendors interested in participating in, and funding, the Retirement Investments Clearinghouse on the program website. The Clearinghouse is to provide information on registered vendors and employer-sponsored plans.
When design of a program that meets the parameters of SB 1234 is completed, legislative approval will have to be obtained before proceeding to implementation. Once approval is obtained, and implementation is complete enrollment could begin. The requirement to provide a workplace retirement savings arrangement would be phased in starting with employers with 100 or more employees within 3 months after the program opens, employers with 50 to 99 employees within 6 months, and all others within 9 months.