State IRAs

Government wants to “invest’ all your Money for little or no return.

California Has an IRA for You, 8/23/16 WSJ Sacramento creates a new public option for private workers that politicians control.

Liberals are demanding more financial regulation, supposedly to protect consumers and taxpayers. So why are they cheering a too-big-to-fail state retirement plan for workers in California that would be largely unregulated?

In 2012 Democrats in Sacramento authorized state-managed individual retirement accounts for some six million employees working in the state without access to 401(k)s or pensions.

The legislation required employers with five or more workers that don’t offer retirement plans to automatically enroll employees in a new public option. Employees can opt out. A board comprised of Democrats and their nominees—namely, union reps and attorneys—has been charged with fleshing out the program’s details, which must be approved by the legislature and Governor. The Senate green-lighted the plan in May, and the Assembly intends to vote this week. The legislation gives the board carte blanche to design and manage the state IRAs.

One of the few rules is that the employee contribution must start between 2% and 5% of wages and can only escalate by one percentage point annually up to 10%. Administrative costs after six years are capped at 1% of program assets, which is greater than the operating expenses charged by 90% of IRA equity mutual funds. The board could invest workers’ money however it chooses, so politicians would be able to direct billions toward their favorite causes. However, the board is supposed to stick to U.S. Treasurys or “similar investments” during the first three years to prevent the plans from going belly up if markets crash. So early investors may get little return on their savings.

Taxpayers would have to cover the program’s start-up costs (putatively in the form of a general fund loan), which are pegged at $134 million. And while the legislation stipulates that the state “shall not have any liability for the payment of the retirement savings benefit,” nothing prohibits the legislature from bailing out the plans in the future. Have you ever heard of a public fund that didn’t have an implicit taxpayer guarantee? A legislative analysis notes that “the fiscal impact of this bill is subject to considerable uncertainty.” No kidding. If more workers opt out or contribute less than the board projects, administrative costs could exceed the 1% limit. Taxpayers might have to pick up the difference. The legislation also contemplates a “reserve fund” to smooth out market returns. This would involve the board siphoning off investment returns when markets are roaring to offset losses during other years. What could go wrong? A K&L Gates legal analysis commissioned by the board warns that “early participants and short term participants may not benefit from the reserve and could even experience reduced returns in good market years.” On the other hand, “if the reserve fund becomes sizable, the Board and the State Government may face pressure to ‘break open’ the reserve for immediate allocation or, conceivably, some State purpose.”

English translation: A retirement program created by politicians will be subject to political interference. Earlier this year the federal Labor Department proposed an Employee Retirement Income Security Act (Erisa) “safe harbor” for state-sponsored IRAs that waives fiduciary obligations for participating employers. This gives businesses an incentive to drop workers onto the public option. But it also means that workers might not receive typical IRA protections such as audited financial statements and prospectuses. The legislation allows the board to determine its investment disclosures while underscoring that “employees seeking financial advice should contact financial advisors.” K&L Gates has recommended that the board seek an exemption as a “state instrument” from federal securities laws in order to skirt “significant reporting and disclosure obligations, which could make the Program considerably more expensive to operate.” 

Meantime, the board has implored the Labor Department to allow state IRAs covered by the Erisa safe harbor to “impose cost-saving administrative restrictions” on withdrawals. Thus, workers might have to pay a penalty if they want to roll over their accounts into a privately managed IRA or withdraw savings to pay for college. 

Progressives are flogging California’s plan as a prototype, and such paragons of fiscal rectitude as Illinois, Oregon, Connecticut and Maryland are following its road to retirement serfdom. Don’t expect the Consumer Financial Protection Bureau to guard taxpayers and workers against this government-backed lemon.

Source: Wall Street Journal