CalSavers sued in federal court

A California-based advocate for taxpayers is asking a federal court to void the The California Secure Choice Retirement Savings Program, a state-administered IRA savings plan.

The program, rebranded as CalSavers, will ultimately require employers that don’t sponsor a retirement savings plan and have at least five employees to enroll workers in Roth IRAs administered by a savings board chaired by California’s Treasurer, John Chiang.

Upwards of 6.8 million Californians will be eligible. Under legislation signed into law by Gov. Jerry Brown in September of 2016, workers without access to workplace savings plans will be automatically enrolled in CalSavers, but have the ability to opt-out of the plan.

But a lawsuit filed by the Howard Jarvis Taxpayers Association in the U.S. District Court for the Eastern District of California claims CalSavers violates the Supremacy Clause of the U.S. Constitution because the Employee Retirement Income Security Act, a federal law, preempts California’s law.

Under ERISA, all employer-sponsors of private sector retirement plans are fiduciaries. Under California’s law, employers that will be required to participate in CalSavers will not be considered fiduciaries.

ERISA “does not allow state-run retirement programs for private employees,” according to HJTA’s complaint. The advocacy group, which made its name in the late 1970s backing Proposition 13, alleges participants in CalSavers will be deprived of the consumer protections built into ERISA.

HJTA also alleges the more than $1.5 million in expenditures on the CalSavers program so far, and the $16.9 million loan approved by California’s Legislature from the state’s general fund, amount to wasteful spending of taxpayer money.

“Strong legal ground”

Treasurer Chiang and CalSavers’ investment board are named as defendants in the suit.

“We remain confident that we are on strong legal ground,” said Chiang in an email to BenefitsPRO.

“For an organization which styles itself as a champion of taxpayers, the Howard Jarvis Taxpayers Association shockingly fails to recognize that if we don’t help our citizens build a nest egg with their own money they will ultimately become wards of the state wholly dependent on public assistance for their most basic needs,” he said in a previous press release.

Legislation championing a state-administered retirement plan option for the private sector was first introduced in California’s legislature a decade ago.

In 2016, the initiative was green-lighted when the Obama administration’s Labor Department updated a safe harbor for state-administered plans that allowed for automatic enrollment, so long as participants were allowed to opt-out after enrollment.

But that safe harbor was rolled back in the first months of the Trump administration, when Congress narrowly voted it down under the Congressional Review Act. California and other states promptly announced their plans to move forward with the IRA programs.

The lawsuit against CalSavers uses language in the state’s most recent budget proposal that says the program cannot be implemented unless the Labor Department finalizes a safe harbor for state-administered plans. The budget proposal requested a $170 million loan for the program.

The claim also cites language in California’s statute that says CalSavers cannot be implemented “if it is determined that the program is an employee benefit plan” under ERISA.

But the statute authorizing CalSavers says the program is structured in a way that would keep the program from being classified as an employee benefit plan under ERISA.

Under California’s law, employers have no liability, no responsibility for employees’ decision to invest in the plan, and no responsibility for the investments offered in the plan. “The program is a state-administered program, not an employer-sponsored program,” according to language in the statute.

When California’s lawmakers crafted the law, they appear to have accounted for the possibility of legal challenges under ERISA’s preemption clause.

“If the program is subsequently found to be preempted by any federal law or regulation, employers shall not be liable as plan sponsors,” California’s law says. “An employer shall not have civil liability, and no cause of action shall arise against an employer.”

Moving ahead with investment policy statements, RFPs

HJTA’s lawsuit came days after CalSavers adopted a formal investment policy statement, and issued requests for proposals for a program administrator and investment managers.

A pilot launch for select large employers is slated for later this year. The first full stage of the three-phase rollout is expected late in 2019 for employers with more than 100 workers, according to the California Treasurer’s website. Businesses with more than 50 workers will by phased in by 2021; businesses with more than five workers will be phased in by 2022.

Workers will be defaulted into Roth IRAs at 5 percent of the wages, with the option to adjust the savings rate or opt out of the plan. The first $1,000 of savings will be defaulted into a capital preservation investment. Savings after that will be defaulted into target-date funds or target-risk funds, depending on options provided through the RFPs.

Passively structured investments will be the “primary investment tool” for participants in the program, according to CalSavers investment policy statement. The cost to administer the fund will ultimately be limited to 1 percent of its total assets, and will be paid for out of an administrative fund.

California’s statute has a provision allowing employers to terminate an existing private sector retirement plan in order to allow workers to enroll in CalSavers.

Katie Selenski, CalSavers’ executive director, said that provision is not designed to encourage existing sponsors to dump retirement plans.

“We don’t expect it to be common for employers to quit their existing plans and instead offer CalSavers,” Selenski told BenefitsPRO. “Especially for those employers offering 401(k)s with a match, that could be considered a cut in compensation and would presumably pose a retention issue.”

California’s law also includes a Retirement Investments Clearinghouse provision, which would allow private sector providers to market retirement plans to employers through the CalSavers website. Development of the clearinghouse will be contingent upon interest from private sector providers.