The state-sponsored California retirement savings program CalSavers completes its iterative implementation process this week when all employers of five or more employees must comply. If success is measured by getting individuals to contribute to an IRA, on a pass/fail basis, CalSavers gets a passing grade—much like OregonSaves.[i] However, using the more traditional grade scale, I would give it a D-.
Data as of May 31, 2022[ii] show:
- $222MM in assets, resulting from cumulative contributions of $277MM, $37MM of withdrawals, and $18MM in investment losses (including fees)
- 262,000 accounts, with an average account balance of $845
- May 2022 had $19.7MM of contributions, and $3.4MM of Withdrawals
- Median contribution ~$129/month, $1,428/year,
- Average contribution rate 5.1% of pay
Why a passing grade?
To avoid financial penalties[iii], employers who do not offer a tax-qualified plan must default individuals into participation. California supplanted 285,000+ workers’ prior (non)decision on whether or not to contribute to an Individual Retirement Account (IRA). Clearly, more California workers are contributing to an IRA because of CalSavers.
Why a D-?
Ignoring the cumbersome administrative process and payroll expense, we are left with:
- One-third of all who were auto-enrolled have opted out,
- Less than 1,000 have voluntarily elected to participate in CalSavers,
- One of every six accounts, 46,000, has had a partial or total withdrawal, and
- The asset management fees range from 82.5 basis points to 95 basis points.
For comparison, some financial services firms offer Roth and Traditional IRAs with no fees and no minimum balance requirement.[iv] Similarly, some financial services firms now offer Target Date Funds with significantly lower asset management fees.[v]
Additionally, in part to avoid ERISA preemption[vi], CalSavers does not reach a sizable portion of the California working population:
- The self-employed,
- Individuals whose employer sponsors a tax-qualified plan but:
- Are not in an eligible class,
- Have not met the age and service eligibility requirements,
- Are eligible to participate, but did not voluntarily enroll, and
- Those whose employer sponsors a non-contributory plan but are not vested.
Further, CalSavers sends mixed messages to participants in the program, confirming that they can access their funds at any time, for any reason; yet, at the same time, misleading workers with statements suggesting a “typical” CalSavers participant will have $7,060 in annual retirement income.[vii] The example is misleading in that it assumes full annuitization after 40 years of consistent saving at 5% of pay per year, with no withdrawals, and no dislocation due to turnover. It also assumes a $15/hour wage at age 25, with annual increases in real wages and investment earnings averaging between 6.33% and 7.15% per year.[viii]
We can do better. This is suboptimal, substandard, especially because payroll deduction is so 20th Century.
Best practices for California might include outreach to each CalSavers participant suggesting that they may want to consider an asset transfer to a superior IRA alternative. For continuing contributions, most payroll systems allow workers to electronically direct funds by splitting paychecks. If not, many, perhaps a majority of Americans already bank electronically.
And, if the federal government is interested in “auto-IRA”, there are better solutions than payroll deduction IRA programs—a solution that would prompt a savings decision twice each year, one that reaches all wage earners; one that does not impose any cost on employers, and one that offers lower administrative and investment management fees.[ix]
Interested? Contact me at jacktowarnicky@gmail.com.
Disclaimer #1: My comments are my own based on my past experiences in plan sponsor roles and do not necessarily reflect those of any employer or association I have been employed by or affiliated with, past, present, or future.
Disclaimer #2: Information was provided by individuals with knowledge and experience in the industry and not as legal or tax advice. The issues presented here may have legal implications and you should discuss this matter with legal counsel prior to choosing a course of action. This article is intended to be informational only. It is not (and you/others should not use it as a substitute for legal, accounting, actuarial, or other professional advice. Any advice contained in this article was not intended or written to be used and cannot be used by anyone for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person [or to promote, market or recommend any transaction or subject addressed herein]. You (others) should seek advice based on your (their) particular circumstances from an independent tax advisor.
[i] J. Towarnicky, Retirement Savings Crisis: Access Isn’t the Issue, Prioritization is, 2/26/21, Accessed 6/29/22 at: https://4o1k.co/3bRO4eM [ii] CalSavers Retirement Savings Program, Participation & Funding Snapshot as of 5/31/2022, Accessed 6/29/22 at: https://4o1k.co/calsavers_reports [iii] CalSavers, “… each eligible employer that, without good cause, fails to allow its eligible employees to participate in CalSavers, on or before 90 days after service of notice of its failure to comply, shall pay a penalty of $250 per eligible employee if noncompliance extends 90 days or more after the notice, and if found to be in non-compliance 180 days or more after the notice, an additional penalty of $500 per eligible employee…” Accessed 6/29/22 at: https://4o1k.co/employer_calsavers [iv] For example, see Fidelity, Traditional IRA, Accessed 6/29/22 at: https://4o1k.co/retirement-ira_traditional-ira [v] R. Berger, B. Curry, The Best Target Date Funds For Retirement, Forbes, 6/1/22. Fidelity Freedom Index 2060 Fund (FDKLX), 12 basis points; Vanguard Target Retirement 2060 Fund (VTTSX), 8 basis points; State Street Target Retirement 2060 Fund (SSDYX), 9 basis points. Accessed 6/29/22 at: https://4o1k.co/advisor_retirement_best-target-date-funds [vi] Howard Jarvis Taxpayers Ass’n v. Cal. Secure Choice Ret. Savings Program, U.S., No. 21-558, certiorari denied 2/28/22. [vii] CalSavers, We keep it simple: you can take out your money when you need it, “While the program is meant to help you save for retirement, we understand that life has its ups and downs. What you do with your savings is entirely up to you, and the money you save is available to you if you need it in an emergency.” And “a typical 25-year-old California worker who participates in CalSavers would be expected to save enough retirement savings to generate a $7,060 in annual retirement income.” Accessed 6/29/22 at: https://4o1k.co/calsavers_home_withdrawls [viii] N. Rhee, California’s $15 Minimum Wage and Secure Choice Retirement Savings Program Can Boost Young Low-Income Workers’ Retirement Incomes by 50%, UC Berkeley Labor Center, December 2017, Accessed 6/29/22 at: https://4o1k.co/labor-center_berkley-edu [ix] J. Towarnicky, Retirement Plan Access is An Issue, Coverage is Not, Disparities in retirement savings and household wealth affect individuals of all races and ethnicities, 401kSpecialist.com, 12/6/21, Accessed 6/29/21 at:
Jack Towarnicky provides independent benefits consulting and serves as a member of aequum, LLC and of counsel for Koehler Fitzgerald, LLC.