Econintersect: An editorial in The New York Times today (22 September 2012) brought to our attention new legislation in California that awaits Governor Jerry Brown’s signature. The new law would establish the California Secure Choice Retirement Savings Program. This would offer a retirement savings plan to an estimated 6.3 million Californians working in the private sector who have no access to or coverage by a pension plan today. Under the act California workers would automatically be enrolled in the plan and would contribute 3% of earnings through automatic payroll deduction, unless they opt out.
According to a report from the Economic Policy Institute by Ross Eisenbrey and Monique Morrisey:
Though some of the details remain to be worked out by the plan’s board of trustees, workers would probably be assured of recouping their contributions while retaining some of the upside of investing in a balanced, low-cost fund.
The individual accounts would be pooled and managed by a low-cost independent advisor. The investment manager could be private or CalPERS (California Public Employees’ Retirement System). The management would be on a periodically renewable contractual basis.
The plan would have a security provision that would guarantee some low level of return (underwritten by insurance) and would allow the individual accounts within the pool to grow with market growth, minus the management and administrative fees and the guaranteed return insurance premium. The lowest cost variation of implementation would be an insured guarantee of no loss of contributed principal. If a guaranteed annual average return were to be guaranteed, the cost of insurance would rise. And if the guarantee was even more aggressive, such as 2% greater than the rate of inflation averaged over the account lifetime, insurance premiums would be higher still.
Administrative and management costs should be very low for such a large pooled fund. A guide for possible expenses would be Vanguard Mutual Funds which average 0.2%. The cost of insurance premiums could well be larger than the cost of investment management and administration.
This proposal differs from other common retirement plans and plan proposals.
- California Takes On The Retirement Crisis (Editorial, The New York Times, 22 September, 2012)
- California retirement plan could serve as a national model (Ross Eisenbrey and Monique Morrisey, Economic Policy Institute, 13 September 2012)
- Mutual Fund Investing (Costs, Vanguard website)