New Retirement Program Features Mandatory Employer Payroll Deductions

Bryan Little, FELS COO

October 17, 2016

California employers with at least five employees will eventually have make automatic payroll deposits into a state-sponsored retirement savings program—but not anytime soon.

The California Secure Choice Retirement Program will require covered private-sector employers that don't already offer a plan—like a 401(k)—to enroll their employees in the program. Workers who don't want to participate will be able to opt out. 

Gov. Jerry Brown signed Senate Bill 1234 on Sept. 29, authorizing a state-operated board to set up the program.  And while AB 1234 establishes the broad outlines of the program, many important details remain undefined.  The program will be implemented in stages; the employer mandate won't begin until at least 2018.

The Secure Choice Investment Board can't start staffing the program until Jan. 1, 2017, according to Grant Boyken, the state deputy treasurer. The board will then have to design and implement the program.

After the program is operating, employers with 100 or more employees will have 12 months to enroll workers. Employers with 50 to 99 employees will have 24 months, and employers with 5 to 49 employees will have 36 months.  As a result, employer participation – and paycheck deductions that are sure to draw employee questions – may still be years away. 

The state will impose a penalty $250 per employee per year for employers that either don't offer their own retirement savings plan or don't enroll their employees in the state-sponsored program, which will feature automatic enrollment at a 3% employee contribution rate.  About 7 million California workers are expected to be affected by the program.  The Secure Choice Board has the authority to lower the base contribution rate as low as 2 percent or to raise it as high as 5 percent.  Contributions may be subject to annual increases of no more than 1 percent per year, capped at 8 percent.  Employees can decline the automatic increases or opt out of the program altogether.

SB 1234 is supposed to protect employers from liability under the program if they comply with Board regulations.  Under the language of SB 1234, employers will have fiduciary responsibility for the retirement program, and will note be liable for retiree benefits or performance of assets invested in the program on behalf of participating employees. 

According to Deputy State Treasurer Boyken, an employer’s role will be limited to passing information from the board through to employees, and deducting and transmitting the payroll contributions.