An investment industry trade group is trying to kill a California bill that would make retirement savings accounts an almost universal benefit for workers in the state, saying that plan will be more expensive than lawmakers anticipate and could ultimately cost taxpayers.
In a letter sent Monday to Gov. Jerry Brown, Washington trade group Investment Company Institute laid out a bevy of arguments against the retirement proposal and essentially asked Brown to veto legislation that, if approved by the Assembly, would create the new program.
"We urge you to examine the program closely and consider the significant risks — fiscal risks, legal risks, and, for California's workers, financial and investor protection risks," the group wrote. "In the face of those risks, we believe that the program should not go forward."
Though the letter is focused on potential risks to the state and to workers, ICI sees risks for its members, too.
The trade group, which represents managers of mutual funds and other investment vehicles that could ultimately manage money on behalf of the state savings program, said consultants have underestimated the cost of the program — and that higher costs could later reflect badly on ICI members.
What's more, ICI officials say the state-run retirement savings plan would compete against private plans, potentially hurting ICI members and cutting down on the number of companies that offer such plans as an employee benefit.
Senate Bill 1234 has already passed through the state Senate and will be taken up by the Assembly this month. It would create the California Secure Choice Retirement Plan, which would offer individual retirement accounts, or IRAs, to private-sector workers whose employers don't offer a pension plan or 401(k) plan.
Nationally, fewer than half of private-sector workers are offered a retirement savings account through work, and most workers who don't have an employer-sponsored plan don't go to the trouble of creating their own plans, according to the AARP and the National Institute on Retirement Security.
Those trends, coupled with the loss of many traditional pension plans, have state and federal officials concerned that many workers will head into retirement with far less in savings than they'll need.
That's why lawmakers in several states, including Oregon, Illinois and Connecticut, are considering state-run retirement plans similar to California Secure Choice.
Karen Friedman, policy director of advocacy group Pension Rights Center, which has advocated for state plans, said investment industry groups have lobbied against such plans in other states and she's not surprised to see them fighting California's proposal.
"I've seen this opposition since the day this started," Friedman said. "Financial associations feel like this is in some way competing with private-sector options. I think some of it is a knee-jerk reaction to anything new."
It's also a reaction to the potential influence a California plan might have. If the most populous state in the nation creates a state-run retirement savings program, it could ease the way for other states to do the same.
"A lot of people are looking at California," she said. "It's important that this goes through."
The California plan would apply to workers at companies with at least five employees that don't already offer a retirement savings plan, covering an estimated 6.8 million workers.
Employers would be required to either offer a retirement savings plan on their own or sign their employees up for the state program and put between 2% and 5% of workers' wages into the plan, unless workers opt out.
Other than signing up employees and diverting money from their paychecks, employers would have little or no responsibility for the plan — something state officials said is meant to make it easy for employers to get on board.
But Brian Reid, ICI's chief economist, said making it so easy could encourage some employers who offer 401(k) plans — which come with administrative and regulatory costs — to eliminate that employee benefit and instead sign their workers up for Secure Choice.
What's more, he said employers who don't already offer a savings plan might be less interested in doing so if the state plan exists.
He said the program could become "the path of least resistance" for employers, to the detriment of some workers.
Deputy State Treasurer Grant Boyken — whose boss, Treasurer John Chiang, supports the savings program — said he doesn't think employers that offer savings plans will drop them in favor of the state system.
"I think they would do it at their peril, to drop a better benefit in favor of Secure Choice," he said. "I think they'd lose their employees."
ICI also argues that lawmakers are relying on rosy estimates of how much it might cost to run the program. SB 1234, authored by state Sen. Kevin de León (D-Los Angeles), calls for spending no more than 1% of the assets invested in the plan on administrative costs — a figure ICI said might not cover all costs.
That's a worry for the trade group, ICI's Reid said, because if costs end up being higher than expected, lawmakers and others might blame the investment managers — that is, ICI members.
"We're anticipating future criticism of the private sector," he said. "These are going to be expensive plans. The story line then will be, 'You're charging us X times more than what was anticipated.' "
Boyken acknowledged that estimates of program costs are just that, estimates, but said money managers who have spoken with the Treasurer's office seem to think the estimates are not unrealistic.
"There are many in the industry who think this will pencil out," he said.
Another concern raised by ICI is the specter of a taxpayer-funded bailout of the program.
Though SB 1234 makes clear that investments in the Secure Choice program would not be guaranteed by the state — unlike public pension payments — ICI argues in Monday's letter that state lawmakers may feel compelled to divert state funds to backfill the retirement savings programs if investment losses pile up.
"In other words, California taxpayers may need to come to the rescue of the program," ICI wrote.
Boyken said the bill is clear that the state is not on the hook if Secure Choice investors lose money, and said there's been no political pressure for the legislature to backfill losses in a state-run college savings program.
But that program is much smaller, with some 600,000 accounts compared to the millions who would be eligible to invest through Secure Choice.
"Could there be pressure? Sure," Boyken allowed. "But I can't predict the future."
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11:50 a.m.: This article was updated with comments from Karen Friedman and additional details.