State’s re­tire­ment plan

CalSavers en­rolls em­ploy­ees who don’t have pro­gram at work

San Francisco Chronicle (Sunday) - - BUSINESS REPORT - KATH­LEEN PEN­DER

Zachary Davis, who with a part­ner owns a small ice cream plant, two ice cream shops and a cafe in Santa Cruz, started of­fer­ing a health care plan to his staff be­fore he legally had to. He wanted to of­fer a 401(k) plan, but the cost and “com­pli­ance chal­lenges” were sim­ply too high, he said.

“It was go­ing to cost $8,000 to $10,000 for the au­dit and setup,” he added. “Then there was the ad­min­is­tra­tion.” His com­pa­nies, the Penny Ice Cream­ery and the Pic­nic Bas­ket cafe, em­ploy about 50 work­ers, but many are stu­dents who come and go. Track­ing who was el­i­gi­ble to par­tic­i­pate would be an ad­min­is­tra­tive night­mare for a com­pany with­out a full-time hu­man re­sources per­son “and if we missed some­thing

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.

Jim Gen­sheimer / Spe­cial to The Chron­i­cle

Zachary Davis, owner of the Penny Ice Cream­ery in Santa Cruz, talks with em­ployee Monique Plossl. Davis is one of the first 20 em­ploy­ers to reg­is­ter in the state’s CalSavers re­tire­ment sav­ings pro­gram.

Jim Gen­sheimer / Spe­cial to The Chron­i­cle

Em­ployee Mary Or­tiz rolls out dough for waf­fle cones at Santa Cruz’s Penny Ice Cream­ery, one of the first busi­nesses in the state to en­roll in CalSavers.

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