Auto Enrollment for Retirement Savings Begins

Half of employers in the UK don’t offer a pension to their employees. Auto-enrolment, the opt-out defined-contribution system designed to fill this gap, was introduced in the UK on October 1. interviewed Lawrence Churchill who chairs he government-funded pension fund, NEST, one of the funds on offer, during the first day of the rest of the fund’s life. (Feathering NEST, 10/10/2012)

Auto-enrolment will be phased in, reaching 8 per cent in 2017, with contributions split 3 per cent from the employer, 4 per cent from the employee, and a 1 per cent tax relief on net pay. The fund is aimed at low-income workers and does have some constraints for growth, in particular it can’t take contributions of more than £4400 per person a year.

A similar retirement option may be offered in California, if start-up funds can be found and the fund pencil’s out. Unfortunately, the California bill provides for opt-in, not opt-out. Below is the announcement by bill author Senator Kevin De León.

Millions of hard working Californians will be given the chance to have retirement security as Senator Kevin De León (D-Los Angeles) announced today that Governor Brown signed companion bills Senate Bill 1234 & Senate Bill 923 putting into statute the California Secure Choice Retirement Savings Trust – introduced by Senator De León and co-authored by California Senate President Pro Tempore Darrell Steinberg (D-Sacramento).

“This is a major step forward for retirement security in America,” said Senator De León. “I am grateful for Governor Brown’s acumen and with his leadership we are setting the path for middle class hard-working Americas to prepare for retirement so they won’t be forced into poverty. There is still much work to do ahead but this could serve as a national model for retirement savings.”

Called a “a model for addressing a national problem” in a recent editorial by the New York Times, the California Secure Choice Retirement Savings Trust is aimed at the 6.3 million Californians, mostly lower and middle-income workers, who have no access to a retirement plan at work, by providing them a portable and reliable retirement plan that will serve as a modest supplement to Social Security. SB 1234 is modeled after successful annuity funds offered to colleges and nonprofits, and to several international retirement systems.

Currently workers in small- and medium-sized firms are disadvantaged in their access to employer-sponsored retirement plans—in California, 84% of people working for employers with 25 or fewer workers do not participate in a retirement plan at work. Social Security is the foundation of retirement income for the vast majority of retirees in California, but these payments alone, averaging $1,181 per month, are not enough to sustain workers in retirement. Implementing these bills will enable personal responsibility, ebbing the impending crisis of millions retiring into poverty which would put a further strain on our already scarce public resources.

Under the California Secure Choice Retirement Savings Program, voluntary contributions from employees would be deposited into a professionally-managed retirement fund that leverages economies of scale and longer investment horizons to provide every California worker the chance to enroll in a retirement savings program. Unlike employer-sponsored retirement plans such as 401(k)s, employers participating in the California Secure Choice Retirement Savings Program would not bear any fiduciary responsibility and would not be required to pay administrative fees or comply with federal quarterly-reporting mandates.

Once fully implemented, the program would be self-sustaining and extremely low-risk due to the modest rate of return (likely tied to the 30-year Treasury-bond rate) and long investment horizon. In setting the rate of return for the retirement savings program, zero-liability would be ensured to the state by requiring the Board to secure private underwriting and reinsurance to protect the returns earned by program participants.

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