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A new law will take effect on Jan. 1, 2017 that will require California employers with five or more workers to offer their staff a retirement plan or enroll them in a new state-run retirement program.

The law, the first of its kind in the nation, is expected to become a blueprint for other states that are considering creating their own retirement plans.

Employers that already offer their workers a retirement plan, like a 401(k), will not be required to participate, but those that don’t will have to to enroll their employees in the California Secure Choice Retirement Program (SCRP).

Once enrolled, a minimum of 3% will be deducted from employees’ paychecks on a pre-tax basis.

The law does not require employers to match the deduction, nor does it require them to pay their own funds into the plans.

For the first three years of the program, all assets will be invested in U.S. Treasuries, or IRA accounts – the savings program established by the U.S. Department of Treasury that also invests savings in bonds issued by the federal government.

Enabling regulations still have to be written, however the law spells out some of the major provisions, as follows:

  • Workers will be able to opt out of the program.
  • The minimum amount employees will be required to divert to the retirement plan is 3%, but the board of directors for the SCRP is authorized to set the level between 2 and 5% of salary, depending on the length of time an individual enrollee has participated in the program.
  • Over time, deferrals may automatically escalate up to an 8% threshold.
  • Workers will have the option to adjust deferral rates, but must abide by the minimums.
  • The program will be administered by an investment board, comprised of nine members and headed by the state treasurer, and will include several members appointed by the governor.

 

The law prescribes that it take effect Jan. 1, 2017, but a number of media reports have said that said that the ramping up period for the state may be too short – and that implementation may therefore be delayed.

 

Large employers first

Mandatory enrollment will be phased based on the size of eligible employers:

  • Employers with 100 or more workers will have 12 months from the time of the program’s launch to enroll them.
  • Employers with 100 or more workers will have two years from the time of the program’s launch to enroll them.
  • All other eligible employers with five or more workers will have three years to enroll them.
retirement concept

retirement concept