California’s cockamamie plan

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California’s Gov. Jerry Brown recently signed into law a bill that would require small businesses to enroll their workers in a state-run defined contribution plan. It’s called the California Secure Choice Retirement Savings Investment Program.

If implemented, this would be the first such state-run defined contribution, or DC, plan. That’s a 401(k)-type plan as opposed to a pension plan.

California always seems to be at the leading edge of innovation, but it’s also at the leading edge of fiscal ruin. Three of its cities, Stockton, Mammoth Lakes and San Bernardino, filed for bankruptcy protection this year, and ratings agency Moody’s expects more to come. This is in large part because of the Golden State’s pension obligations to their public workers. California carries the nation’s largest unfunded pension liabilities, at $398 billion-plus.

CalPERS, the biggest pension fund in the country, is challenging San Bernardino’s bankruptcy filing. The city has stopped making payments to CalPERS and is about $6 million in arrears, according to an article appearing Thursday in the San Bernardino Sun. The Sun calls California’s unfunded pension and health care liabilities “staggering.”

So it’s interesting that California would introduce a retirement plan for private workers, ostensibly to enhance their retirement security, and that government workers would be exempt. All private companies with five or more workers that do not already have a retirement plan in place would be obligated to offer it, and workers would be automatically enrolled to contribute 3 percent of their paychecks (though the workers could opt out). Those employers who elect not to offer this plan could be subject to a stiff fine of up to $500 per employee, according to the Trucker Huss Benefits Report.  Trucker Huss is an employee benefits specialty law firm based in San Francisco.

Secure choice?

Before the Secure Choice plan can be implemented, an appointed governing board would have to get the OK from the Labor Department to run the program independently of ERISA, the massive federal law that sets minimum standards for pension plans in the private sector. And it wants the IRS to allow contributions to be made on a pretax basis, according to that report by Trucker Huss.

More interesting is that the board, which would consist largely of California state officials, would be “authorized to maintain a ‘gain and loss reserve account’ to which ‘excess earnings’ may be allocated. Presumably, those excess earnings could be used to offset investment losses in subsequent years,” according to the report.

Excess earnings in a DC plan? Shouldn’t these go into the accounts of the individuals who are contributing to them? Already I don’t like this plan. It seems like a scam.

Labor groups support the program and say it won’t cost the state a nickel because it will be backed by insurance. But detractors say that taxpayers would be on the hook if the program doesn’t meet investment targets, and that this new program is a thinly disguised way for the state to plunder the funds for its own purposes. A scathing editorial in the Sacramento Bee calls it “nothing more than an attempt to raid the private sector for cash flow to cover abuse, misfeasance, malfeasance and fiscal recklessness that bankrupted the state’s public pension plans.” Frank Keegan wrote that column; he often writes about pension reform as the editor of, which is affiliated with, a nonprofit organization dedicated to the transparency of state and local governments.

If this program does get off the ground, I would encourage the low-wage workers for whom it was designed to opt out and take charge of their own retirement planning by signing up for a Roth IRA.

What do you think?


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Written by
Barbara Whelehan
Contributing writer
Barbara Whelehan is a contributing writer for Bankrate. Barbara writes about a range of subjects, including homebuying, real estate, retirement, taxes and banking.