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California’s New Retirement Program – Do We Need It?

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The media coverage of last year’s presidential election drowned out the news of a controversial retirement program announced by the state of California – the California Secure Choice Retirement Savings Program.  While its intentions are good, the details show serious limitations and unnecessary use of taxpayer money.

According to the bill’s sponsors, over 6 million California workers don’t have access to a retirement savings program from their employer, and 75 percent of them earn less than $50,000 per year.  

The law mandates that employers with more than 5 employees must participate in Secure Choice unless they offer their own retirement program.  Unless workers opt out of the program, businesses will be required to automatically deduct 3 percent from paychecks to deposit into their employees’ retirement accounts.  Most union employees aren’t covered by the new program.

That sounds like a worthy cause, until you consider some of the program’s limitations.

The contribution limit will be $5,500 per year in 2013 – the same as for Individual Retirement Accounts (IRA’s).  If you’re over 50 you can save an additional $1,000.  That’s not nearly enough to make a sizeable difference in retirement income. 

Another limitation of Secure Choice is that investments in equities cannot exceed more than 50 percent of the overall asset allocation of the fund.  Since bond yields are at near record lows, and bond prices fall when yields rise, that could put a sizeable amount of retirement funds in the wrong place at the wrong time.

A major flaw in this program is there is no fiduciary who is taking responsibility for the investment decisions.  Though the state is dictating many investment choices, they apparently don’t want to be responsible for their recommendations.

While reading the bill it wasn’t clear to me what benefit this program provides that’s not already available in an IRA. Was I missing something?  So I called a Secure Choice representative in Sacramento who spoke on condition of anonymity.  Her only explanation as to its inherent benefit is that the employer can deduct money from paychecks to transfer to an IRA – forcing an automatic savings mechanism.

So this is essentially an IRA program run by the state of California.  While it’s noble of the state to want to create incentives to save for retirement, this could have been done without creating government bureaucracy. 

Fortunately, it will be a few years before the California Secure Choice Savings Program  becomes a reality – the governor has yet to appoint a board of trustees and then they’ll do a “market analysis” using funds from non-state sources.  Hopefully state budget pressures will force them to eliminate the bureaucracy and utilize the IRA to accomplish their goals.  Beyond that, small businesses already have a number of affordable retirement plans to choose from that will be more effective in helping their employees prepare for retirement.

Gary Alt, AIF®, CFP® is co-founder of Monterey Private Wealth in Pleasanton.  Send your questions to gary@montereypw.com