California now in the retirement plan business, with quasi-mandatory participation by both employers and employees

California’s Governor Brown signed SB 1234, the “California Secure Choice Retirement Savings Trust.” into law on September 28, 2012. The law creates a retirement saving plan for the estimated 6.3 million private-sector workers who currently don’t have access to a retirement plan through their jobs. Nothing meaningful will happen until mid-2013, as the plan is still being established, and investment managers not yet identified.

This is a big deal, and has not obtained the press coverage it deserves. California employers with five or more employees will be required to participate in another state-run program unless the employer “offer[s] an employer-sponsored retirement plan or automatic enrollment payroll deduction IRA”. Employees will be required to contribute to this plan unless the employee specifically opts-out.

The Legislative Counsel’s digest of the new law included the following summary:

The bill would require a specified percentage of the annual salary or wages of an eligible employee participating in the program to be deposited in the California Secure Choice Retirement Savings Trust. … The bill would require the opt-out form disseminated by the Employment Development Department to be used to create an option for employees to elect to opt out of the program, as specified. The bill would, commencing 6 months after the program is ready to proceed, require the Employment Development Department to assess a penalty on any eligible employer that fails to make the program available to eligible employees, as specified.”

The portion of the new law requiring mandatory contributions for each employee, and the amount of such contributions follows:

100032 (e)(1) Each eligible employee shall be enrolled in the program unless the employee elects not to participate in the program. An eligible employee may elect to opt out of the program by making a notation on the opt-out form. …

(h) Unless otherwise specified by the employee, a participating employee shall contribute 3 percent of the employee’s annual salary or wages to the program.

(i) By regulation, the board may adjust the contribution amount set in subdivision (h) to no less than 2 percent and no more than 4 percent and may vary that amount within that 2 percent to 4 percent range for participating employees according to the length of time the employee has contributed to the program.”

There are a lot of really lousy 401(k) plans being offered, so perhaps California’s plan will be competitive for at least some existing offerings. Once the terms of the state’s plan become known, you should compare California’s offering to what you have now, and view California’s costs and terms as the minimum acceptable alternative.


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