By Ryan J. Rusak
Lorenzo Harris always knew that offering a retirement program would help him attract and retain the best workers for his janitorial services company. It just wasn’t feasible for his small business — until he encountered CalSavers, a new worker-savings system launching in the Golden State.
“I'm a businessman. I'm very leery of government. But wow, I'm very impressed with CalSavers,” said Harris, who founded his 45-employee company in 1985. “I was just amazed that a government mandate of this nature would actually benefit our company.”
Harris’ company, Janico Building Services, was the first employer to join the state-sponsored retirement program. His employees started payroll deductions in January, and since then, CalSavers has shown even skeptical taxpayers like Harris how public policy can be used as a tool to level the playing field and promote economic opportunity.
“This will allow us to attract employees better, and we can better retain them with a retirement plan,” Harris said.
CalSavers is what’s known as an “auto-IRA,” a retirement program that makes savings the default option for employees. Here’s how it works: Over the next three years, in phases determined by the size of the company, mandated employers will be required to register and allow their employees to enroll in the CalSavers. Workers who join will have 5 percent of their pay diverted to an individual account. The deduction will gradually increase, topping out at 8 percent, though workers can always change the amount or leave the program at any time.
By the middle of 2019, self-employed people and any other individual will be able to sign up, and by 2022, all businesses with five or more employees will enroll as California seeks to get all workers access to a retirement account.
The scope of the problem legislators are seeking to solve is as immense as the goal: 7.5 million California employees work for a business that does not offer a retirement plan. Many of the people who don’t have access to an account through their employer are hourly wage employees, work part time, or frequently change jobs. Women and people of color are most likely to lack savings for the future.
“The big thrust of this is, let's get people access, and let's get them access that they can trust,” said Matthew Cook, who oversees retirement and other financial policy grants for Arnold Ventures. “You're lowering the barrier to entry, and you're establishing savings as the norm.”
The idea for CalSavers relies on a basic principle in behavioral economics. If workers are automatically enrolled and would have to opt-out rather than opt-in, they are much more likely to participate. That “set it and forget it” option, along with the power of compound interest over many years, could help low-income workers build wealth for the first time, Cook said.
You’re lowering the barrier to entry, and you’re establishing savings as the norm.Matthew Cook Oversees retirement and other financial policy grants for Arnold Ventures
According to AARP, people are 15 times more likely to save if they have a workplace account and 20 times more likely to do so if they’re automatically enrolled in it. If auto-IRAs help boost savings in the U.S., it would be an important step toward ensuring people who work hard during their careers are able to retire with dignity and financial security — a key policy priority for Arnold Ventures.
“It’s not just California,” Cook said. “Roughly a third of U.S. workers do not have any retirement savings, which could pose a big problem for governments in the next couple of decades.”
The potential upside of CalSavers is high, both for small-business owners like Harris looking to compete with larger competitors and for workers. So Arnold Ventures provided $1.1 million to two nonprofit organizations, the United Ways of California and Small Business Majority, to create an outreach plan to entice Californians to sign up sooner rather than later.
Legislators in other states are watching the rollout because the CalSavers program has bipartisan appeal and includes protections for Californians and savers. Administrative costs will be covered by small fees on participant contributions, so the program won’t cost taxpayers anything, while professional financial services companies Ascensus and State Street Global Advisors will administer the program and manage investments.
The first $1,000 people contribute will go to money market accounts, unless participants direct their investments otherwise. Subsequent contributions will default into a target date fund based on the participant’s age. Savers can also choose other investment funds, including a bond fund and an equity fund.
Supporters point to two other features vital for low-income workers: portability and flexibility. Workers maintain their accounts when they change jobs, so they won’t face fees or tax burdens to keep their nest eggs growing. That’s critical for people who might have several employers or work in the “gig” economy.
But to get low-income workers to buy into the program, organizers must focus on building trust with a population that may have been burned by unscrupulous financial businesses in the past, said Peter Manzo, president and chief executive officer of United Ways of California.
“Their family members may have had run-ins with payday lenders or they may be very distrustful of the financial industry overall, no doubt, and we're going to have to answer their concerns,” he said.
Harris can relate. Even though the cost and administrative burden put employee retirement plans out of reach for him and other small-business owners, the start of a state-run initiative also brought the dread of paperwork and red tape.
Mark Herbert, California Director of Small Business Majority, said the process has been so smooth, business owners have mostly been concerned that the program is “too good to be true.”
Told it would take about 30 minutes to enroll, business owners have “rolled their eyes and cleared the day on their schedule,” Herbert said. “But it was done in 20 minutes, and they were shocked.”
With CalSavers up and running, the next challenge for Manzo and Herbert will be to spread the word and continue to build on the program’s early success.
“It’s huge, and what's going on in California, Oregon, Illinois can be a model for other states,” Herbert said.