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By Laura Dougherty, Senior Staff Attorney, and Timothy Bittle, Director of Legal Affairs

HJTA in Action: In February, senior staff attorney Laura Dougherty (lower right) argued before the U.S. Court of Appeals for the Ninth Circuit that the state’s mandatory retirement savings program, CalSavers, violates federal law and wastes taxpayers’ money.

On February 8, 2021, HJTA had a unique opportunity to argue in federal court over an issue affecting taxpayers nationwide: Are state-mandated automatic retirement savings programs legal? If illegal, then California is wasting taxpayer dollars.

CalSavers is a new state-mandated retirement savings program for private-sector workers whose employers do not offer a retirement plan. Employers with five or more employees are required to automatically enroll their employees (unless the employee jumps through hoops during each annual opt-out window), then withhold a percentage of their pay and remit those wages to the state of California to “invest.” We put quotation marks around “invest” because the state’s track record handling retirement funds for public employees through the California Public Employees’ Retirement System (CalPERS) demonstrates that the state’s investments often lose money.

HJTA argues that programs like CalSavers are illegal under the Employee Retirement Income Security Act (ERISA) of 1974. Through ERISA, Congress occupied the field of private employee retirement savings. This is an extremely broad federal law that supersedes state laws. For employers, ERISA sets uniform standards to follow. For employees, it provides consistent fiduciary protection, including access to federal courts to resolve any disputes or abuse.

A 2016 Obama administration regulation written by the Department of Labor attempted to specifically exempt these programs from ERISA coverage. But Congress repealed this special regulation in 2017.

Regardless, California and a handful of other states, including Oregon and Illinois, proceeded to implement such programs, without further advice from the Department of Labor and without any other potential basis of authority.

California taxpayers should not be footing the bill for an illegal program preempted by federal law, so HJTA became the first to challenge the program in court in an effort to stop the hemorrhaging. A $16.9 million general fund loan had been approved for CalSavers, and over $1.5 million has been spent since the program’s inception. California taxpayers were promised that the loan would be repaid with participant fees. Time will tell if that promise is kept.

HJTA President Jon Coupal informed the U.S. Department of Labor of this case early on. The Department of Labor filed its own briefs in the U.S. District Court and in the Ninth Circuit Court of Appeals. They agreed with HJTA that CalSavers is illegal under federal law, carefully articulating multiple reasons why CalSavers is preempted by ERISA. Primarily, the 2016 Obama administration regulation on which CalSavers relied was eliminated by Congress during the Trump administration. It was eliminated by statute, so the permission it granted cannot now be revived without congressional action.

From 1974 to date, it has clearly been the intent of Congress to keep private employee retirement savings in the federal domain. Congress has twice considered a nationwide program similar to CalSavers, and other legislation to promote retirement savings. Overlapping federal and state programs would be unworkable.

It was no surprise that the states of Illinois and Oregon, along with AARP and Ascensus, wrote amicus (friend of the court) briefs to the Ninth Circuit in support of CalSavers. Ascensus is administering CalSavers and other state programs. These briefs repeated the arguments of the state of California and made impassioned policy arguments about solving a retirement crisis in America. Ironically, Illinois and Oregon confessed that one-third of Americans are withdrawing retirement funds to pay bills. Maybe the problem is not the lack of access to a retirement savings program, but rather the average overtaxed person’s inability to save for the future while still making ends meet in the present.

On February 5, the Biden administration instructed the Department of Labor to withdraw from participation in our case even though the department had supported HJTA’s argument earlier on. This was just three days before HJTA argued the case to the Ninth Circuit. The Department of Labor’s analysis remains sound and relevant, but the department cannot file more briefs or take a side.

HJTA is often asked: “What’s the harm of a state-run retirement savings program?” After all, isn’t it good to help people save for retirement? While HJTA supports and defends the financial security of its Members and California taxpayers, CalSavers is simply a new, wasteful bureaucracy to fix a problem that does not exist. Every employee already has the ability to set up an IRA with automatic deposits using any one of several existing private institutions. The problem is not the lack of access to save. The problem is that, sadly, most hardworking Californians cannot afford to save for retirement in the first place. CalSavers only exacerbates that problem by adding more to the cost of running state government, making it necessary to raise taxes even higher on those hardworking Californians.

Further, the CalSavers program is inferior to private sector retirement alternatives. With CalSavers, there is no option for employer contributions as there is with 401(k) and 403(b) plans. There is no guaranteed rate of return, no government backing, and choices are narrow. With a private IRA, an employee can direct that his or her money be invested in many ways, such as American stocks, or real estate, or precious metals, or a guaranteed annuity, etc. With CalSavers, the employee’s money is pooled and invested by state employees who are restricted for political policy reasons.

The loss of federal remedies is also an issue. What happens if struggling employers make the deductions but don’t send the money on to the state? Under ERISA, employees could seek resolution in federal court. Under CalSavers, they will only be able to sue in state court. That could get complicated if the employer files for bankruptcy, which is in federal court.

There is another reason the program could be harmful. CalSavers statutes allow for commingling with public employee pensions such as PERS and STRS (California State Teachers’ Retirement System), making for a fiscally dangerous scenario. Public retirees are guaranteed a specific monthly pension amount. What happens if the PERS or STRS portfolio loses money? Will the state borrow or siphon money from CalSavers to pay its public retirees?

The future of retirement savings with state-run programs like CalSavers, should they be allowed, is ominous at best. Hopefully the Ninth Circuit will agree and declare CalSavers preempted by federal law.

Note: As of the writing of this article, the outcome of this case is unknown. It can be assumed that the case is still ongoing.