With officials slated to meet today to consider moving ahead with California’s state-run retirement plan proposal, there’s been a call for delay to address “unrealistic or incomplete” assumptions in a state-sponsored feasibility study.
The cautionary note comes from the Investment Company Institute (ICI), the mutual fund industry’s trade organization. It claims that the feasibility study, conducted by Overture Financial LLC, fails to fully consider the range of likely events that could raise the costs and undermine the feasibility of the program. ICI cautions that the unacknowledged/unanticipated costs of the program will fall either on participants or on California taxpayers.
Even under the report’s assumptions, ICI notes, California’s proposed retirement plan would cost participants an annual fee of 100 basis points, which it claims are more than the fees charged by equity mutual funds that hold 90% of the equity fund assets in private-sector individual retirement accounts (IRAs).
ICI outlines its concerns in a letter to California State Treasurer John Chiang, who chairs the California Secure Choice Retirement Savings Investment Board, which is scheduled to meet on March 28 to decide whether to recommend moving forward with “secure choice,” based in large part on the Overture report.
Other Concerns
ICI claims that assuming that the private sector’s experience with automatic enrollment will carry over to the Secure Choice program is not valid, because private-sector plans that offer automatic enrollment also tend to offer other features — most notably employer contributions and loan features — that reward participation, enhance flexibility, and appear to boost participation — and are not part of the California plan. Additionally, the ICI report explains that private-sector plans often provide extensive educational programs to promote the importance of saving for retirement, explain investment options and risk-reward trade-offs, and inform participants on plan features, while California employers that are mandated to participate in “secure choice” are unlikely to provide similar backing to encourage worker participation. ICI also notes that employers that do not currently offer workplace retirement plans tend to have workforces that are younger, less likely to work full time, full year, and lower-earning — all characteristics that reduce workers’ demand for retirement benefits. For these reasons, ICI believes opt out rates could be higher, and participation lower, than the baseline scenario in the Overture report.
Additionally, ICI notes that while the Overture analysis assumes workers will contribute 5% of their pay to “secure choice” IRAs, in survey data presented in the report, 64% of eligible workers said they were likely to contribute less than $100 a month — including 44% who would contribute less than $50. Based on respondents’ maximum likely contributions, the average annual contribution would range from $1,000 to about $1,700 — well below the $2,000 average account balance that Overture projects after the first year. Moreover, ICI notes that the Overture report acknowledges that reducing the assumed 5% contribution rate to 3% would increase the program’s required financing from $89 million to $170 million — a 91% increase.
ICI also notes that the Overture report does not appear to take into account the costs of enforcing employer participation, compliance with the program’s rules, ensuring that workers are eligible to participate, or auditing the program, and that it also fails to consider the full costs of providing participant education, account statements, and other communications.
“Program costs may be higher than projected, which will burden Program participants or California taxpayers, or both,” ICI writes. Finally ICI cautions that creating “a patchwork of state-run programs” would have “the potential to harm the voluntary system for retirement savings that is helping millions of American private-sector workers achieve retirement security.”
