The U.S. Department of Justice is backing a lawsuit that seeks to invalidate the new California state retirement plan. The DOJ’s brief also takes aim at the growing number of states sponsoring retirement savings plans for people who lack access to one at work.

The move is a head scratcher for many financial advisors, who say the CalSavers plan is not only creating future advisor clients who have well-funded retirement plans, but immediately provides an affordable, low-maintenance 401(k) option to employers, while forcing all employers with five or more employees to offer a plan by 2022.

“From the employer perspective, there is no simpler nor less expensive option out there when it comes to retirement plans that I’m currently aware of,” John S. Longstaff, a senior financial planner with The Planning Center Inc., in Fresno, Calif., told Financial Advisor magazine. “No cost, no administration, no recordkeeping. I mean really, what could be easier?” Longstaff asked.

But DOJ’s focus is on legal and jurisdictional issues with state run auto-IRA plans. In a brief filed in federal court earlier in September, the agency argued that California’s program, called CalSavers, violates the federal Employee Retirement Income Security Act of 1974, which governs 401(k)-style plans. Among other things, the Justice Department argues that state-sponsored plans would create “a patchwork of different state laws,” which is “exactly the kind of disuniformity that ERISA was designed to avoid.”

California estimates that 7.5 million state residents who lack a retirement savings plan at work are eligible for the program. It requires employers with five or more workers that don’t offer a plan to participate. Launched in July, the program has $650,000 in assets from 2,150 workers, with several thousand more opening accounts.

Of the estimated 250,000 companies in the state without a retirement savings plan, about 500 are currently signing up and 70 have begun making payroll contributions to individual retirement accounts. All employers with five or more employees must phase their employees into the CalSavers plan by 2022.

Katie Selenski, executive director of California Secure Choice Retirement Savings Investment Board and CalSavers, said not all participants will immediately be a “target market” for advisors. But “if people evolve in their financial lives and move beyond the CalSavers system to a more robust benefit or investment vehicle, then we would see that as a big success,” she said.

The average account size of participants in a similar program in Oregon, launched statewide last October, is around $400—but eventually those assets may grow to the point where investors will be looking for guidance. Portability is key with the program, designed as a Roth IRA (with a traditional IRA being introduced later this year).

CalSavers could, eventually, facilitate a new crop of clients looking for advice.

Opportunities also loom for advisors armed with technology designed to scale low-cost investments for smaller clients, to offer employers and participants a private, less expensive option than the state’s default plan.

That’s because participants auto-enrolled in CalSavers will start off paying nearly 1% in fees on their accounts. The majority of the fee will be paid to Ascensus for administration of the program. Its initial fee is 75 basis points, which will gradually be reduced to 15 basis points if CalSavers is able to cross a threshold of $35 billion in assets.

The state adds on an administrative fee of 5 basis points, with State Street Global's fund fees ranging from 2.5 to 12 basis points. The plans investment options are four funds run by State Street Global Advisors, with an ESG fund available from Newton Investment Management.

As the phase-in for CalSavers continues into 2022, business owners will become aware that they need to make a decision about offering a retirement plan or the decision will be made for them, advisors said. While CalSavers might be good for some, many will prefer a private option. This could be a lead-generating opportunity for advisors to have a conversation with business owners to offer up their services.

For small- and medium-sized businesses without retirement plans, 52% of those employers surveyed would rather start their own retirement plan than use a state-sponsored offering if asked to choose between the two, according to Pew data from 2017.

Top Of Form

Aaron Schumm, CEO and founder of the digital retirement platform Vestwell, said advisors have an opportunity to highlight the benefits and potential cost-savings of their services for employers and participants who are being mandated into retirement savings.

“If you're an advisor and you see a company signing up for this state-mandated IRA program, it could be an interesting opportunity to have a dialogue with those companies,” he said. He suggested digging into what is behind the decision to use a state-mandated program, to ensure employers are doing what's in the best interest of employees.”

"This is great for the employee, but the employer may have more burden than they are prepared for," said Shan Sutherland, a wealth advisor at Simple Impact LLC in Calabasas, Calif.

"The employer is responsible for providing employee information, setting up payroll deductions, and keeping a record of employee contributions," continues Sutherland, "one problem is, many small employers are not prepared with the knowledge or time to respond to this upcoming requirement.

"Choosing a [private] 401(k)-retirement plan is the chance for employers to show their employees they care," Sutherland said.

Currently, California, Oregon and Illinois are enrolling workers in their plans. Other states, including New York, Vermont, Maryland, and Connecticut, are developing similar programs.

The Justice Department argues the federal government “has a heightened interest” in finding the California state law that established CalSavers in violation of federal law, because it “is among the first of a number of similar state” laws “to be challenged” in the courts.

CalSavers’ legal woes began in 2018, when the nonprofit Howard Jarvis Taxpayers Association filed suit in U.S. District Court for the Eastern District of California, seeking to invalidate the program. The association argues that states can’t impose a retirement plan requirement since such plans are already regulated under ERISA.

In March, U.S. District Judge Morrison England Jr. dismissed the Taxpayers Association first lawsuit in 2018, but allowed the group to amend its complaint.

The Justice Department declined to comment.