Retirement plan sponsorship by number of employees

Private sector workers in California without a workplace retirement plan are one step closer to being able to save through their employer.

As you may remember from a post last month, the California legislature was considering legislation that would provide a public option to the 6.3 million California workers without a workplace retirement savings plan.  Since passing the California Senate in May, it recently passed the House and was signed into law by Governor Jerry Brown. But the plan won’t be implemented right away.

Prior to implementation, Governor Brown called for a feasibility study – to be followed by a final vote from the legislature – before the new system goes into effect. State senator Kevin de León, the bill sponsor, hopes implementation will happen by the end of 2013.

The goal of the new system is to ensure all workers have the option to save for retirement. It includes a guaranteed rate of return tied to Treasury bonds, and would eventually require all businesses with at least five employees to participate. All contributions, whether from employer or employee, would be voluntary.

Is it needed?

Currently, many small businesses are less likely to offer workplace retirement plans because of high costs and complexity. In fact, 2009 data from the Investment Company Institute (ICI) estimates that just 17 percent of businesses with fewer than 10 employees offered a plan, and 30 percent of businesses with 10 to 24 employees offered options. By comparison, 65 percent of businesses with 500 to 999 employees offered plans.

However, the limited number of small businesses offering retirement plans is inconsistent with high demand for the plans among their employees. The same ICI survey shows a desire to save for retirement among all workers, regardless of workplace size. Of employees who work at businesses with fewer than 24 employees that offer a plan, an average of 78 percent participated in their workplace retirement plan – very close to the overall average of 80 percent.

While the legislation has the support of some who believe it is a good step to improve retirement security for California workers, others worry it could be a potential financial liability if the guaranteed rates of return are not realized. To address that concern, a bill analysis from the California legislature found the program to be privately insured and not guaranteed by the state. Senator de León told The Sacramento Bee that this program could lead to a “national model for retirement savings.”

The Economic Opportunity Institute has spearheaded efforts in Washington state to create a similar system in the past, and is currently working with the Seattle City Council and Mayor’s office to find a solution to the retirement savings gap.

Providing retirement savings options for all workers isn’t just necessary to ensure financial security in retirement, it’s also beneficial to the local economy and community in the long run. Although California has not yet officially enacted their system, they are one step closer to ensuring all workers are able to save for retirement through their employer regardless of where they work.

By EOI Intern Bill Dow