It may come as a complete surprise to learn that the state of California is going into the 401(k) business. It has to be true because it was in the newspaper. This new program is not to be confused with new state employees being shunted out of retirement plans and into a 401(k) look-alike. It is for the 6 million private-sector employees who are currently not offered any plan. Could this be an idea whose time has come, or just a futile effort on the part of state government?
The legislation calls for the state to operate what will be named the California Secure Choice Retirement Savings Trust. It will effectively offer a cost-effective retirement savings opportunity to workers who are not currently offered any retirement plan.
A set percentage of money will be deducted from the pay of those who elect to sign up, and the accounts would be administered by the Employment Development Department and a newly formed state agency which would do the record-keeping. The investment management would be offered by a clearinghouse of financial vendors -- presumably mutual fund companies and insurance companies. In addition, the assets would be insured so that the account balances would be guaranteed at some level.
It all sounds good on paper unless the financial services industry is salivating at the thought of how much they can make on a captive audience. Back when the talk of privatizing Social Security was heating up, the president of Massachusetts Financial Services suggested that one-third of a percent per year would be reasonable and a great deal for Social Security participants. We all know how that would have turned out.
Meanwhile as we speak, Vanguard is just now further reducing its cost of their 500 Index Fund to one-twentieth of 1 percent per year. Simple arithmetic would tell us how much profit a companies like MFS and others would expect to make if they were charging more than seven times what Vanguard charges to do the same work.
Since the plan would be voluntary on the part of employees, it remains to be seen as to how much participation there would be. Anyone not covered by a company plan today is free to set up their own IRA, but not that many people do. So what is the perceived void that the new state plan is expected to fill?
First of all, very few companies with more than, say, 10 full-time employees are still without a 401(k) plan. The problem is confined to very small companies that can't afford the hassle factor of operating the plan. Simple plans do exist for small companies, but they incur the expense of employer mandatory contributions, which ends the discussion for many employers. If the state plan proves to be successful enough, however, it might prompt the replacement of what are now conventional 401(k) plans -- but I'm not holding my breath.
The greatest challenge of voluntary retirement accounts of all stripes, whether it's IRA's, 401(k)'s 403(b)'s or other retirement plans, is the fact that people don't sacrifice enough today to meet tomorrow's needs.
One possible explanation may come from outside the financial services industry. I'm reflecting on insight shared by the originators of the political strategy industry whose company, Campaign, was founded in Mill Valley in 1933.
It's painful to read, but the quote attributed to the founders in the latest New Yorker magazine says, "The average American doesn't want to be educated, he doesn't want to improve his mind, he doesn't even want to work, consciously, at being a good citizen. But there are two ways you can interest him in a campaign. ... You can put on a fight, or you can put on a show. If you put on a good show, Mr. and Mrs. America will turn out to see it."
It's this height of cynicism we see reflected in today's political campaigns almost 80 years later.
By comparison, when promoting retirement plans, there is no way to put on a fight or put on a show. If people who otherwise have the means aren't interested in saving or learning how to manage investments, our hands are tied. On the other hand, if we make retirement saving as easy as falling off a log with a "one-click" approach at any company in the state, it is a noble experiment worth trying.
Steve Butler is CEO of Pension Dynamics. Contact him at email@example.com or 925-956-0505, ext. 228.