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California to Implement State Retirement Plan

California lawmakers are set to vote on a bill this week that would enroll employees into a state-run retirement plan. The proposal would cover approximately 7.5 million state residents whose employers do not offer private retirement plans.

The state-sponsored plan would be run by the California Secure Choice Retirement Savings Investment Board, first established in 2012 and currently staffed by state officials and political appointees. The bill to be voted on this week would require all California employers with five or more employees to participate. Workers will be automatically enrolled, with the option to opt out, with a default contribution amount of 3% of their salaries, unless another amount from 2% to 5% is selected by the employee. There will be no mandated employer match, however.

“The state activity is likely to lead to the biggest increase in coverage in literally decades,” David John, senior strategic policy adviser at the AARP Public Policy Institute, told Forbes. “What we’re seeing right now is a major improvement in the status quo.”

For the first three years, the program is expected to invest in low-risk debt securities while the Board develops additional investment options for participants. “The benefits of such a plan are the lower fees and higher returns that come with pooled contributions and professional management,” writes the Editorial Board at the New York Times. “The burden on employers is minimal: They have to deduct the employees’ contributions from paychecks. The risks to the state are also minimal: Because the accounts are financed entirely with employee contributions, they do not present the fiscal problems associated with many public pension funds.”

Meanwhile, there has been some concern surrounding the plan’s long-term viability. In an editorial for the Sacramento Bee, Paul Schott Stevens, president and CEO of the Investment Company Institute, a global advocacy group for mutual funds, says that the plan could require a taxpayer bailout to cover any shortfalls or large expenses.

“Support for Secure Choice is based in part on a study that understates several potential risks,” writes Stevens. “Even with automatic enrollment, more workers than expected may opt out of the plan. The analysis assumes that the opt-out rate will match that for workers in private-sector plans such as 401(k)s. But Secure Choice workers will be younger, have lower earnings and be more likely to work part-time – all factors that would reduce participation.”

Legislation for similar plans has been introduced in more than 25 states since 2012. Illinois and Oregon have already passed laws creating comparable state-run programs, which are scheduled to go into effect next year.