California's New Retirement Program Gets Under Way

Employers that don’t offer a retirement plan will be required to participate

By Toni Vranjes January 7, 2019
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California launched a pilot program in November 2018 to help more workers save for retirement. But the new state-run program, called CalSavers, is facing legal controversy and uncertainty.

CalSavers is designed to help employees who work for employers that don't have a retirement savings program save for retirement by facilitating contributions to an individual retirement account (IRA). According to the California state treasurer's office, the program will benefit about 7 million workers in the private sector.

Although state officials are proceeding with their plans for CalSavers, the future of the program is unclear. A taxpayers' rights group is challenging the program, claiming that it violates the U.S. Constitution.

However, Katie Selenski, the executive director of CalSavers, said the program is proceeding as planned.

CalSavers Timeline

For now, employers can apply to join the CalSavers pilot program as early adopters. Their employees will be enrolled automatically unless they opt out. Beginning in July, all eligible employers in the state will be able to enroll their workers.

Eventually, most California employers that lack a retirement savings plan will be required to do one of two things: either enroll their workers in CalSavers or provide a retirement plan through the private market.

The deadlines for employers without a workplace retirement program to sign up for CalSavers are:

  • June 2020 for companies with more than 100 employees.
  • June 2021 for companies with 50-99 employees.
  • June 2022 for companies with 5-49 employees.

Program Structure

If employees participate, funds will be automatically deducted from their paychecks, and this money will go into their CalSavers IRA account.

By default, 5 percent of their pay is deducted from each paycheck, although the employee can choose a different contribution rate. The employee's contribution rate will automatically increase by 1 percent each year until it reaches 8 percent, unless the worker makes a different choice.

CalSavers retirement plans are portable, so employees will have access to them if they change jobs.

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

The program is administered by financial services firm Ascensus. According to the California state treasurer's office, participating employers aren't fiduciaries or liable for workers' investment decisions, and they don't contribute to the employees' retirement accounts.

Nevertheless, participating employers do have certain obligations, such as uploading an employee roster in order to enroll workers and submitting employee contributions to CalSavers.

A Mixed Bag

A plus of the program is that participating employers might attract and retain more workers, according to Melissa Shimizu, an attorney with Fisher Phillips in Irvine.

Employers will be required to meet ongoing requirements, such as handling the transfer of payments to CalSavers, said Ross Boughton, an attorney with FordHarrison in San Francisco. However, the CalSavers system should provide a valuable tool for employees, which will in turn benefit their employers, he said.

The program is also a mixed bag for employees. Although workers will have the opportunity to save money for retirement and enhance their financial security, there are potential downsides.

"Like any investment in general, there's always some risk to it," Boughton said. "You could lose money."

Legal Issues

In May, the Howard Jarvis Taxpayers Association filed a lawsuit in federal court attempting to invalidate the CalSavers program. The group alleges that CalSavers "violates the Supremacy Clause of the United States Constitution because it is expressly pre-empted" by the Employee Retirement Income Security Act (ERISA).

According to the complaint, "ERISA establishes nationally uniform standards to protect private employees and does not allow state-run retirement programs for private employees."

The association claims that under CalSavers, employers "automatically become ERISA plan administrators with all attendant administrative and legal liabilities."

Former President Barack Obama's administration created an ERISA safe harbor for state-sponsored retirement plans, in which these plans would be exempt from ERISA, Shimizu noted. But President Donald Trump later signed a resolution that rescinded those safe harbor regulations.

Without that protection, state-sponsored retirement plans in California and other states must rely on U.S. Department of Labor regulations to determine whether the program is an ERISA-covered pension plan, according to Lorne Dauenhauer, an attorney at Ogletree Deakins in Portland, Ore.

Employee participation must be "completely voluntary" for the program to be exempt from ERISA.

Dauenhauer highlighted a key feature of the CalSavers program as potentially problematic: automatic enrollment of workers unless they opt out. So is this type of program completely voluntary?

"That's certainly something that could be open to interpretation," Dauenhauer said.

There's a credible argument that CalSavers is subject to ERISA given the automatic enrollment feature, said John McGowan, an attorney with BakerHostetler in Cleveland.

"At the very least, it's unclear," he noted.

"On the advice of the attorney general and our legal counsel, we cannot discuss pending litigation other than to say with total confidence that California's program is legal, and this challenge is baseless," Selenski said.

Despite the legal challenge, employers that are required to participate in CalSavers should comply with the program's deadlines, Shimizu said.

Employers can adopt a policy stating that they have no control over individual investments in the CalSavers program, McGowan said. Companies should make it clear that investment discretion is in the employees' hands, he added.

Toni Vranjes is a freelance business writer in San Pedro, Calif.

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