On August 31st, California Senators passed SB 1234 (1234, you can’t make this stuff up) legislation to establish a State controlled retirement plan for workers without access to 401k or pension plans by employers with five or more employees. Governor Brown is expected to sign the bill into law this year.
California Secure Retirement Savings Program legislation six years in the making establishes a retirement savings program called, “Secure Choice” that employees can contribute towards. Contribution rates start at 3% – 5% of their wages increasing 1% per year up to 10% of wages.
Senator Kevin de Leon, the author of the measure, stated,
“Regardless of socioeconomic status, the hard-working people of California who have made our state a global economic powerhouse deserve a measure of financial security in their Golden Years. This will benefit our current workers and younger generations who will finally have an easy and reliable way to save for the future.”
California State Treasurer John Chiang, who chairs the California Secure Choice Retirement Savings Investment Board established by the legislation, is quoted on Senator de Leon’s website stating,
“SB 1234 will help California’s elderly workers avoid a retirement filled with financial uncertainty. Secure Choice is the most significant step forward toward the goal of providing all Californians with a dignified retirement since the establishment of Social Security in 1935,”
The first issue is whether or not paying politicians for six years to work on this legislation solved a problem. Just like the arduous work by engineers to design motion-sensor paper towel dispensers (evidently millions were unable to extract paper towels unassisted), Secure Choice creates another government controlled program funded by taxpayers. If you haven’t recently been accosted upon entering your bank branch, you would know that banks, investment companies, broker-dealers, mutual fund companies, investment advisors, etc. all offer IRA plans to everyone. Your investment choices are almost limitless, ranging from mutual funds, stocks, bonds, real estate, and precious metals. If you can fog a mirror, are over the age of 18, and have earned income, you are qualified to open your retirement account and deposit up to $5000 per year. Also, you can contribute up to 100% of your income and not just 3% to 10%. Worth noting is that there is no mention in the legislation that the employer or state will match your contribution. In essence, the government is solving your problem with your money. *Thanks*
Diving into the murky details is where it gets fascinating. The first question investors should ask is where, when, and how much.
Where will the money be invested? For the first three years, the funds are to be directed into US Government Treasury bonds or their equivalent. The rationale is US treasuries are the safest security for retirement funds. However, the yields are very low and below inflation with the 10 Year Treasury interest rate currently at 1.6% and shorter duration bonds down to 0.3%. After the third year, the California Secure Choice Retirement Savings Investment Board, consisting of elected officials, union leaders, and attorneys, invest the funds at their discretion. *No worries here*
When can you get your money and what if you want your money now? Well, there’s a problem if you want it now. Should you have second thoughts about losing complete control of your retirement account or not impressed with sub-1% returns, transferring your Secure Choice retirement account may be subject to early withdrawal penalties. K&L Gates legal analysis commissioned by the board warns that:
“Early participants and short-term participants may not benefit from the reserve and could even experience reduced returns in good market years.”
In the same analysis, K&L Gates suggests that the board seek an exemption as a “state instrument” from federal securities laws to skirt “significant reporting and disclosure obligations, which could make the program considerably more expensive to operate.”
Lastly, how much will SB 1234 cost participants and taxpayers? The good news is the legislative analysis notes that “the fiscal impact of this bill is subject to considerable uncertainty.” Initially, the setup costs are estimated at $134 million and annual administrative charges to the participants at around 1% of assets. However, if participants withdraw their funds early, or the level of contributions are below projections, the costs could be higher.
The real concern is if employers seeking to reduce costs begin terminating their retirement plans to force employees into the Secure Choice plan with little disclosure, return on investment, or accountability. In our opinion, it would be a great disservice to the public if the government manages our retirement money.
Our goal at Financial Time Traveler is to be the antithesis to outsourced investing. When “Robo-Advisors,” AKA Robo-Allocators and Government bodies remove the education portion of investing, conflicts will occur. Senate Bill 1234 is an excellent example of behavioral economics gone wrong.
Individuals need to save on their own or will be forced into another Social Security program.
Another attempt for government to acquire and control retirement savings.
The best way to save is to do it yourself; you don’t hand it over to someone else and especially not politicians.
If you have any questions or comments, let us know in the section below!