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March 28 — A California retirement savings program for private-sector workers should move forward with limited investment options for the first three years while federal legal and regulatory issues are resolved, the state Secure Choice Retirement Savings Investment Board said.
In a 9-0 vote March 28, the board recommended that the state legislature pass a pending bill to authorize the board to launch the program, which would be available to about 6.8 million Californians whose employers don't offer retirement savings plans.
California lawmakers could approve the bill in the next five months, making the state the first in the country with such a program. Illinois, Oregon and several other states are planning similar programs.
If lawmakers follow the board's recommendations, Secure Choice would invest employee contributions in U.S. Treasuries or similarly safe vehicles for the first three years while the legal hurdles are addressed. During that time, the board would explore offering investment options that reduce risk and smooth market losses and gains, such as custom-pooled funds and the creation of a reserve fund.
The key hurdle is whether the Securities and Exchange Commission will view the investments as securities, triggering registration, disclosure and audit rules. The board also approved a memorandum of understanding with Illinois and Oregon to use the same outside law firm to engage with the SEC on the issue.
David E. Morse, a partner with K&L Gates LLP in New York, told the board via phone that he will work with the SEC to secure a “no action letter” or other guidance that clarifies Secure Choice is exempt from securities laws because it is promoted by California. He will be seeking similar guidance for Oregon and Illinois.
“I think it's going to take some time for them to wrap their head around this,” Morse said of the SEC. “It's going to be novel.”
California and other states are also awaiting final rules from the Department of Labor stating that the programs don't fall under the Employee Retirement Income Security Act. The DOL proposed the rules (RIN 1210-AB71) in November .
The board is asking that the legislature authorize it to establish the basic program design, which would include an initial automatic employee contribution rate between 2 percent and 5 percent; automatic escalation of the contribution rate each year to reach 10 percent of salary with an option for participants to opt out of escalation and change their rates; and fiduciary duty placed with the board and its contracted administrators and consultants.
The program would apply to employers with five or more employees.
Senate President Pro Tempore Kevin de Leon (D) said at a news conference after the board vote that his bill to authorize the program, S.B. 1234, is scheduled for its first committee hearing April 22. It could reach the governor's desk as early as July. The legislature adjourns for the year Aug. 31.
Secure Choice has the support of employee and labor groups, which are pushing for a pooled-investment model to minimize risk .
A coalition of employer groups including the California Chamber of Commerce, California Building Industry Association and California Retailers Association told the board in March 10 written comments that employers aren't opposed to Secure Choice but still have questions about employer cost and risks that have gone unanswered.
The investment industry, including the Securities Industry and Financial Markets Association and the Investment Company Institute, have raised concerns about unrealistic assumptions in the market analysis and feasibility study prepared for the Secure Choice Board by Overture Financial LLC. The board's recommendations to the legislature are based on Overture's report .
The employer and investment groups asked that the board conduct more analysis before moving forward with the program.
“We are concerned that program participants or California taxpayers—or most likely both—will find themselves bearing unanticipated costs as a result of the program,” ICI said in written comments submitted to the Secure Choice board March 24 .
The Secure Choice board is led by State Treasurer John Chiang (D) and includes State Controller Betty T. Yee (D); Gov. Jerry Brown's director of finance, Michael Cohen; and appointees of the governor and the legislature.
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