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California Joins State-Run Retirement Plan Ranks

Another state-run retirement program for the private sector is now on the books.

California Gov. Jerry Brown (D) on Sept. 29 signed into law legislation that will implement the California Secure Choice Retirement Plan. Brown hailed the effort four years in the making as helping millions of Californian workers in an age of “spend now, and don’t worry about it until later” to “save now, and prepare for later.”

California Senate President Pro Tempore Kevin de Leòn, who authored the legislation, and California State Treasurer John Chiang, who oversaw the feasibility and legal analysis of the new program, celebrated the political achievement during the bill-signing ceremony. But all acknowledged that there will be much more work ahead to make the program a reality.

Now What?

The statute becomes effective Jan. 1, 2017, but it will be many months before the program is actually expected to be operational. The board created by the statute will need to make various implementation decisions — chiefly to determine which entities are responsible for handling the various administrative, recordkeeping, custodial and investment functions required to make the program function properly. That will take some time.

The statute allows for the state to fund the start-up and first-year administrative costs, but the board must repay those costs back over time, plus interest. In future years, the statute directs that the necessary costs be paid out of an administrative fund.

The law will be gradually phased in over a three-year period to allow time for the affected private employers to prepare. When fully phased in, it will require all private employers with five or more employees to either offer their own retirement savings program or automatically enroll their workers in the state-based payroll deduction IRA program at 3% of pay. The statute directs that the proceeds be invested in U.S. Treasuries, myRAs or similar investments for up to three years following implementation of the program.

California has now become the eighth state to enact a retirement program for private sector workers, including Maryland, Connecticut, Illinois, Massachusetts and Oregon, while Washington State and New Jersey have both launched small plan marketplaces. Approximately half the states are currently considering measures to close the retirement coverage gap. None of these programs have become operational to date, although Oregon has pledged to open its program for enrollment on a pilot program basis by July 2017.

Andrew Remo is the American Retirement Association’s Director of Legislative Affairs.