California's Retirement Savings Revolution

Millions of workers are unprepared for the financial challenges that will face them during retirement. With the gradual disappearance of traditional pension plans from their employers, most workers can at best hope for coverage under 401(k) plans and similar employer-sponsored plan options that require them to make their own contributions toward their retirement savings. For those whose employers choose not to provide such a plan, workers have little recourse.

But the California state government is seeking to change that. Less than a month ago, Gov. Jerry Brown signed the law that created the California Secure Choice Retirement Savings Trust, and assuming that the program survives a market analysis study, gets a sign-off from federal officials, and once again gets approval from the California legislature, the law will go into effect.

How it works
The program envisioned by the California law is relatively simple. Under the law, employers that have five or more employees and don't offer their own employer-sponsored retirement plan would automatically withhold 3% of each employee's paycheck and send that money to the Secure Choice Retirement Savings Trust. There, it would be held in an IRA for the benefit of each worker. Workers would have the option to opt out of the program or to change their contribution percentages from the default 3% level.

The law calls for a slate of appointees to choose an investment manager to invest funds within the Trust. The program would allow the manager to invest up to 50% of assets in stocks -- with bonds, real-estate securities, insurance products, and mutual funds among the other permitted investment options. At the same time, however, it would require the manager to take steps to ensure that the value of participants' accounts would be protected, specifically contemplating the use of annuities or other insurance-based mechanisms to do so.

Pros and cons
Proponents of the measure point to several attractive attributes that the Secure Choice Retirement Savings Trust would provide. The program would be portable, allowing employees to change jobs from one eligible employer to another without having to switch account providers or do cumbersome rollovers. With provisions for guaranteed return of principal, the program arguably balances risk and reward in a way that matches what workers want.

But opponents see the program as an attempted money-grab for the California Public Employees' Retirement System, which many believe would be named the investment manager under the law. With an estimated $7 billion going into the Trust in its first year, the money would represent just a small piece of the roughly $233 billion that CalPERS manages in public pension accounts. Despite assurances that money would be held separately, some are fearful that commingling could result in a transfer from private-sector employees to public employees.

Will it work?
Few would argue that people shouldn't have more retirement savings options. The new law doesn't really do anything that the workers affected by it couldn't do themselves, simply by setting up IRA accounts of their own and making automatic contributions. It does make retirement saving slightly easier for those who lack bank accounts and who wouldn't meet minimum initial investment requirements.

Moreover, concerns about CalPERS appear to be overstated. Looking at the pension fund's most recent investment report from 2011 (link opens PDF), you'll find that fund managers appear to follow a simple buy-and-hold strategy for much of its portfolio. That has produced gains on many stocks, although you'll find inevitable losses, including declines from the fund's book value on investments in financial stocks AIG (NYS: AIG) , Bank of America (NYS: BAC) , and Citigroup (NYS: C) . Moreover, with a global reach, the portfolio also includes beaten-down European stocks Banco Santander (NYS: SAN) and France Telecom (NYS: FTE) , along with plenty of other former high-fliers in international markets. Over the long haul, the fund has generated returns of 8.4% over the past 20 years.

Perhaps the most valid criticism of the program is the fact that 3% contributions aren't likely to add up to very much, especially for the lower-income workers that the state targeted in the law. In the fight to provide retirement security, though, every little bit is a step in the right direction.

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