With the fading of private pension funds, America’s system of private retirement saving increasingly depends on payroll deduction and the 401(k) system, and with good reason. It’s easiest to save the dollars that never reach our wallets. Unfortunately, the current system doesn’t work well for small businesses and their employees.
Small business is the dynamic sector of the economy, creating most new jobs. But the flip side of that dynamism is that many small businesses aren’t in a position to offer and administer a 401(k) retirement savings plan or defined benefit pension to go along with those jobs. Many small businesses are simply too small or too new, or their revenues are too low or too uncertain. Many find it too administratively burdensome or costly to set up a retirement program. The fees structures are often hard to figure out and the administrative and investment costs of a plan are disproportionately high for firms with few employees.
That is bad news both for the economy and the retirement hopes of millions of Californians. Unable to offer a retirement savings plan, small businesses find it harder to attract and retain workers. And 8 million California workers, most of them working for small businesses, have no access to a workplace retirement plan.
California has an opportunity to fix the system. Legislation now pending in the state Senate, AB 2940 authored by Assemblymember Kevin DeLeon, D-Los Angeles, and supported by Gov. Arnold Schwarzenegger, would leverage existing state systems to create the California Employee Savings Program, providing easy, low-cost, portable, payroll-deduction retirement saving accounts for small businesses and their workers.
The new program would work like this: The California Public Employees Retirement System would offer, either directly or in partnership with financial services firms, the new accounts, which could be invested in a limited number of low-cost indexed mutual funds. Any business without a retirement plan could offer the accounts to its workers, and any worker without access to a workplace retirement plan could open an account.
Workers would chose, within the restrictions of federal law, how much of their wages they wished to save, and the funds would be automatically deducted from their paychecks and forwarded to the state through the state payroll tax system or other mechanism the state provides and credited to their accounts. Just like any other IRA, the account would be owned by the worker, who could take it from job to job, direct how the money is invested, and move it to any other financial institution. The accounts would be voluntary, for both workers and employers. Employers could chose and would be encouraged — but would not be required — to match employee contributions by setting up the accounts as what is known as a simple ira. The program would cost taxpayers nothing; it would be totally financed with de minimus fees paid by the account holders, as in California’s ScholarShare college savings program.
It’s easy to see the value of this proposal for workers. At a time when more than half of workers don’t have access to a retirement saving plan at work and the federal government projects that one-third of today’s young workers will reach retirement age with nothing but a Social Security check, AB 2940 creates a simple, low-cost way for every Californian to save by payroll deduction.
But the program will be equally valuable for small businesses. Small firms that can’t afford to set up their own retirement plan are at a competitive disadvantage in hiring and retaining talented employees. AB 2940 levels that playing field. It would let small businesses offer their workers the kind of low-cost, high-quality retirement saving plan usually available only at the largest corporations. And it would come with no obligation other than to deduct and forward the savings of workers who choose to participate. That is how to make the retirement saving system work for small business and its employees.
Scott Hauge is president of Small Business California. John Arensmeyer is CEO of Small Business Majority. Thomas Martin is president of the Small Manufacturers Association of California.