San Francisco Chronicle - (Sunday)
State helps workers build nest egg
we could be in expensive legal trouble.”
That’s why Davis last week became one of the first 20 employers to register for CalSavers, a grand experiment in retirement savings.
CalSavers is a staterun retirement program for workers in California whose employers don’t offer one. By June 2022, all private-sector employers with five or more workers that don’t offer a qualified retirement plan will have to register with CalSavers.
Upon registration, employers must upload their workers’ names and contact information to CalSavers and facilitate payroll deductions, but they won’t have to pay any costs and can’t contribute to worker accounts. Participants must shoulder the costs. Once an employer registers, workers have 5 percent of their pay automatically diverted to a Roth individual retirement account in their name, unless they opt out or choose a different investment rate.
CalSavers frequently cites an AARP study that says 57 percent of California’s private-sector employees, roughly 7.5 million people, work for a business that does not offer a retirement plan. At companies with fewer than 100 employees, that number is 77 percent, and among workers making $14,000 or less, it’s 82 percent.
Getting those people to save for retirement will help them and the public because “we will have fewer people reliant on social services and the state safety net,” said CalSavers Executive Director Katie Selenski.
That’s a laudable goal, but critics question whether it’s legal, whether it’s needed, whether it will discourage employers from offering more generous plans and whether it will get big enough to become selfsustaining and pay back a startup loan from the general fund.
California is the third and largest state to implement such a plan, following Oregon a year ago and Illinois this year. All three states are using the same company, Ascensus, to administer their plans.
CalSavers started signing up 20 employers for a pilot project two weeks ago and will add more volunteer companies through June 30. Starting July 1, any employer without a plan, including the self-employed, can register. The deadline for registration is June 2020 for employers with 100 or more workers, June 2021 if they have 50 or more and June 2022 if they have five or more.
The Legislature passed a bill to study such a plan in 2012, and another in 2016 to create it under the state treasurer’s office. It agreed to lend the program up to $19.4 million from the general fund to get started.
Originally called Secure Choice, it has faced multiple hurdles. Under President Barack Obama, the U.S. Department of Labor gave state-run retirement plans legal protection if they followed strict rules. Among them: Employers could have little involvement and employee participation had to be completely voluntary. The Labor Department under President Trump overturned that rule.
California forged ahead with its plan after getting a favorable opinion from a law firm. “We are very confident we are on solid legal ground,” Selenski said. In May, the Howard Jarvis Taxpayers Association filed a lawsuit seeking to block CalSavers on the grounds that it is invalid under federal law and not completely voluntary. CalSavers filed a motion to dismiss the lawsuit. A decision on that motion is pending.
CalSavers “is illegal and solving a nonexistent problem,” said Laura Murray, a lawyer for the association. “Anyone can go into a bank or online, open an IRA in a matter of minutes and set up auto debit” from a bank or in some cases a paycheck.
That may be true, yet many employees never do it. A recent Federal Reserve study found that one-fourth of working adults nationwide had “no retirement savings or pension whatsoever.” Amando Popp, who manages the Picnic Basket cafe for Davis, started a Roth IRA at a brokerage firm three years ago at the urging of his father. But figuring how to do it “was not as easy as making a cake,” he said. Popp, 25, would have started saving two years earlier if he’d had access to an employer plan. “I think it’s brilliant to have people enrolled through their work and make it easier to participate, or at least get their foot in the door,” he said.
It’s an “indisputable fact” that auto-enrollment increases participation in retirement plans, said James Choi, a Yale University finance professor. Whether it increases contributions depends on whether the default investment rate is higher or lower than what employees, left to their own devices, would invest.
Another big question is whether auto-enrollment increases workers net worth or causes them to borrow more to offset their smaller paychecks.
The first $1,000 that workers put into a CalSavers account will go into a money market fund currently yielding 2.14 percent, unless they choose a stock, bond or target-date fund. The fee on the money market fund is almost 1 percent a year, eating up nearly half its return. Paying off credit card debt, and even some other debt, would be better use of those funds, said Andrew Biggs, a resident scholar at the American Enterprise Institute, a conservative think tank.
A team of researchers from Harvard, Yale and the U.S. Military Academy tried to see whether auto enrollment increased worker debt. It looked at what happened after the U.S. Army began automatically enrolling newly hired civilians into the federal government’s Thrift Savings Plan.
In a paper released last December, they said that four years after hire, auto-enrollment caused “no significant change in debt excluding auto loans and first mortgages.” But it did “significantly increase auto-loan balances by 2 percent of income and first mortgage balances by 7.4 percent of income.”
If workers took out a bigger mortgage to buy a bigger house, that’s not necessarily a negative for net worth, said Choi, one of the authors. Taking out a bigger auto loan is usually a negative because cars depreciate. The study “rejected the worst-case scenario,” that auto-enrolled workers would borrow more on their credit cards, Choi said.
Biggs said he is not “100 percent against” state-run retirement plans, but asks, “How big is the problem these are trying to fix relative to the problems they could cause?”
He said low-income workers become lowincome retirees not because they didn’t save but because they never earned much. “You are asking low-income people to make themselves poorer by putting money they could spend into these accounts,” he said.
Biggs pointed out that Social Security replaces a much higher percentage of salary for low-income than high-income workers. Saving money in an IRA could jeopardize some government benefits that have means testing that includes retirement accounts, he added.
After employees have $1,000 in CalSavers, their future contributions will go into a target-date fund unless they choose otherwise. Most target-date funds own stock, and one question is how employees will react if the stock market plunges. Will they exit and never return?
Like Davis, many small employers don’t offer retirement plans because the overhead is high. As companies grow larger, those costs can be spread over many employees so the cost per participant comes down. CalSavers says it can bring down costs by putting millions of small-company employees into one plan.
Initially, CalSavers will charge participants just under 1 percent of assets per year, but those fees “are going down dramatically over time,” Selenski said. Most of that fee, 0.75 percent, goes to Ascensus, and the rest goes mainly to State Street, which manages the investment funds.
“By the time we get to $35 billion” in assets, the Ascensus fee will be just 0.12 percent, Selenski said, but she declined to give any timetable. “It’s a long-term proposition,” she said. “We are trying to effectuate pretty substantial social change with this program.”
A 2016 feasibility study estimated that 6.8 million workers are potentially eligible for CalSavers and 70 to 90 percent would participate. It projected that by the first year of operation, the plan would have 1.6 million participants and over $3 billion in assets.
Enrollment in Oregon’s program, however, has been far below what was projected in a 2016 feasibility study and somewhat below updated estimates in a March study.
Oregon required employers with 100 or more workers to register last November, and those with 50 to 99 in May.
Roughly 81,000 employees have been entered into the program, called OregonSaves. Of those, 47,000 have enrolled but only 22,800 are contributing. About 17,000 have opted out, and another 17,000 are “pending” because the employee hasn’t decided whether to opt out, the program has a wrong address or other reasons.
If you divide the 47,000 who have enrolled by 64,000 (the 81,000 entered minus 17,000 pending), the participation rate is 73 percent, “about what we expected,” said Joel Metlen, the program’s operations director.
The percentage of those who are contributing, however, is about half that.
Metlen said some employees are enrolled but not contributing because it can take up to 90 days after a employee gets hired before payroll deductions start. Many large employers in OregonSaves are staffing agencies that “hire tons of people,” many of whom don’t get jobs or work for only a day. In addition, many enrollees work for less than 90 days at Christmas tree farms, ski resorts and other seasonal jobs.
OregonSaves has $9.7 million in assets. Employees have withdrawn a total of $1.5 million. The “exciting part” is that people are enrolling and saving, Metlen said. “People in our original pilot have about $1,300 saved. That’s a significant amount for people who are hairdressers or work in a chocolate store.” While Oregon may have been the first, all eyes will now turn to California as its even bigger program gets under way.
Kathleen Pender is a San Francisco Chronicle columnist. Email: kpender@sfchronicle.com Twitter: @kathpender