California Moves Forward with State-Sponsored Retirement Plan

Law would require employers to make auto-deposits into retirement savings accounts

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(Editor's Note: Brown signed S.B. 1234 on Sept. 29.)

California lawmakers passed a bill on Aug. 31 that would require certain private-sector employers to arrange for automatic payroll deposits into employee retirement savings accounts.

The California Secure Choice Retirement Program (S.B. 1234) has been implemented in stages, explained Alan Cabral, an attorney with Seyfarth Shaw in Los Angeles. "The program would apply to employers with five or more employees and without any other retirement plan," he said.

If the bill is signed by Gov. Jerry Brown, covered employees would be automatically enrolled and would have the right to opt out of the program.

The state program "will offer a hand—not a handout—to 6.8 million working Californians whose employers do not offer a retirement plan," said Senate President pro Tempore Kevin de León in an Aug. 25 statement.

Opponents of state-sponsored retirement savings programs, however, say these plans could create HR and payroll-system challenges.

Phased Implementation

The bill will create savings accounts for workers whose employers don't offer a pension, 401(k) or other retirement savings option, said Mark Beach, associate state director of communications for AARP California.

The program "will be overseen by the Secure Choice Retirement Savings Investment Board … which will choose an outside vendor to administer the accounts," he added.

If Brown signs the bill, which is likely, implementation could begin as soon as Jan. 1, 2017.

On that date, the board would begin looking at how to open the program for enrollment, said Alden Parker, an attorney with Fisher Phillips in Sacramento, Calif.

Within 12 months of the program opening for enrollment, employers with more than 100 employees and no retirement savings plan must automatically enroll their employees who do not opt out, he explained. Employers with 50-99 employees would have 24 months to enroll workers, and employers with 5-49 employees would have 36 months.

States Encourage Savings

California is just one of many states exploring ways to encourage workers in the private sector to save for retirement.

People are 15 times more likely to save for retirement if they have a workplace savings program, according to Sarah Mysiewicz Gill, a senior legislative representative with the AARP in Washington, D.C.

"Right now there are about 39 million employees nationwide who don't have access to retirement savings through their employers," explained Brian Benko, an attorney with McDermott Will & Emery in Washington, D.C. Although they could open an individual retirement account (IRA) on their own, less than 10 percent of people actually contribute outside of work, he said.

Therefore, states are looking to address the retirement income funding gap, which is estimated to be over $6 trillion, Cabral noted.

"Low-wage workers are often the most likely to be without a retirement plan," he said.

Common Themes

Over 30 states have introduced bills, enacted legislation or at least conducted studies on state-sponsored programs, Benko said, but many have been taking a "wait-and-see approach" to implementation.

On Aug. 25, the U.S. Department of Labor issued guidance on how state-sponsored automatic IRAs can avoid pre-emption by the Employee Retirement Income Security Act.

This may provide some assurance to states that want to implement these plans, at least to a certain degree, Benko noted.

The various proposed and pending programs have some commonalities.

"The general structure tends to be the same, at least for automatic IRAs, which are the most popular option," Gill said.

Employers should note, however, that the threshold for coverage varies from state to state. As an example, Gill mentioned that Oregon's law will apply to all employers, while the Illinois law will cover employers with 25 or more employees.

"The programs typically apply to employers that don't offer any other retirement plan," Cabral said. Key considerations are keeping administrative burdens on employers to a minimum and making it clear that the employer will not be a plan fiduciary.

"The programs are typically some variation of a defined contribution plan with automatic enrollment, a default contribution rate and different investment options," he added.

HR's Role

"Although [state] bills seek to keep employer burdens to a minimum, certain tasks such as enrollment, withholding and transmittals will fall on the employer," Cabral said.

Gill said HR's main responsibilities will be disseminating information and handling payroll transactions.

Benko noted, however, that a multitude of state-sponsored programs could create headaches for HR professionals, especially those who may be subject to programs in more than one state.

Employers need to keep informed of new developments in this area, and they need to understand the scope of the state laws that impact their workforce, Benko said.

Regarding the California bill, Parker said the immediate impact on HR professionals will be record-keeping. They will have to spend time deciding who's responsible for developing and distributing informational materials, he said.

The more overarching concern, if issues arise, is whether the employer is going to be held as a responsible party, Parker noted. It may become crucial for the HR professional to show that an employee was provided enough information to make an informed decision about whether to opt out of the program.

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