An IRA for the rest of us
Israel Briceno has been too busy running his tamale shop to think about saving for retirement.
And no one at Briceno’s bank has ever suggested he start putting money aside for when he’s done working.
But now that a local legislator has introduced a bill to create a state-sponsored IRA, Briceno, 28, is interested in signing up along with his mother, Maria Morales, and one other full-time worker at the aptly named Mom’s Tamales in Lincoln Heights.
“My family never was one to do investments of any type,” Briceno said. “It’s one of the things you don’t think about until someone shows you the way, and you get involved.”
Assemblyman Kevin de Leon (D-Los Angeles) says he’s determined to make it easier for small-business owners and their employees to start putting money aside. His proposal, which has already received a first approval from an Assembly committee, would direct the California Public Employees Retirement System to offer individual retirement accounts to the one in three workers who can’t get traditional pensions or 401(k) plans from employers.
“Millions of working Californians, the backbone of our economy, are putting in hours of work, day after day, but when they retire they have nothing to show for it,” De Leon said.
The problem is particularly severe for lower-income and part-time workers, especially at businesses with fewer than 500 employees. Gardeners, restaurant cooks and construction workers rarely are targeted for sales pitches from the brokers, banks and investment houses that advertise on cable television, he said.
The CalPERS product, if approved, would make California the first state in the country to offer all workers a portable, easy-to-use retirement savings plan to supplement Social Security and other benefits, De Leon said. Pre-tax contributions could be automatically deducted from worker paychecks and forwarded to the state along with payroll taxes.
Employers, who would be free to supplement their workers’ contributions, would participate in the state-backed savings plan at no cost. Employees would pay small management fees that should run far below those charged by banks and private investment firms. Annual returns would outpace earnings at many private funds, if the $245-billion CalPERS continues its recent string of stronger-than-average annual performances.
With average annual earnings of 6.9%, a 25-year-old worker who saves $100 a month would wind up with about $230,000 accumulated by the time he or she retires, De Leon estimated.
Gov. Arnold Schwarzenegger, a Republican who rarely takes a public stance on just-introduced legislation, lost little time throwing his considerable influence behind Democrat De Leon’s bill.
“This legislation will help make businesses more competitive, without costing them anything, and will help employees save for their retirement, without costing taxpayers anything either,” Schwarzenegger said.
Some small-business organizations are enthusiastic about providing their employees with a new benefit that could make them feel more secure about their futures.
“A lot of small businesses can’t afford to provide a 401(k) to employees. There’s a cost involved,” said Scott Hauge, president of the San Francisco-based advocacy group Small Business California.
However, the country’s largest advocate for small entrepreneurs, the National Federation of Independent Business, has taken no position on the De Leon bill. Neither has the California Chamber of Commerce.
CalPERS says it’s studying the proposal to see whether legal issues might prevent it from offering investments to clients who aren’t government workers or retirees receiving traditional, “defined benefit” pensions, spokesman Brad Pacheco said. The CalPERS board of directors and staff are likely to have questions about their fiduciary or trust relationship with private sector participants, he said. The De Leon bill would indemnify CalPERS board members and investment staff from any liability related to an IRA plan.
Labor unions say they support De Leon’s goal but remain noncommittal about his proposal.
“We have a lot of questions about how it works,” said Jim Zamora of the Service Employees International Union, Local 1000, which represents more than 90,000 state employees and CalPERS members.
The securities industry isn’t pleased with the plan, arguing that the state shouldn’t be competing with private sector retirement products.
The Securities Industry and Financial Markets Assn. “believes that the state’s resources are better spent on raising public awareness of existing programs.” Many small-company executives don’t know that some federally sanctioned IRAs are “a cost-effective option that does not place significant burdens” on employers, the association said in a letter to De Leon.
De Leon’s CalPERS plan might not create a huge boost in the amount of money that Californians save for the future, said David Wray, president of the Chicago-based Profit Sharing/401k Council of America. The group represents many large U.S. companies that offer 401(k) investment and retirement benefits to employees.
Individual retirement accounts, unlike heavily federally regulated 401(k) plans, are notoriously “leaky,” meaning that employees can withdraw their funds, after paying a penalty, if they think they need the money, Wray said.
What’s more, opening CalPERS to the general public might prove difficult to achieve, even if De Leon’s bill passes the Legislature and is signed into law by the governor. Allowing a government pension fund to make investments for nongovernment workers would require the granting of a number of legal waivers by the U.S. Department of Labor, Wray said.
Despite the potential pitfalls, Joanne Weinoe, president of Golden State Magnetic & Penetrant Lab Inc., an aerospace testing company in the Arleta area of Los Angeles, says she’s excited about the possibility of helping her 15 employees while lowering her company’s tax bill.
“We could use this as an enticement to prospective employees as well as existing ones,” she said, “and actually save us some money on Medicare and Social Security.”
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