Today Mayor Tim Burgess transmitted to the City Council his signature plan for a city-wide retirement savings program for employees of private employers.
This is an idea that Burgess has been kicking around for a while, and now that he’s Mayor (and will shortly be out of office) he’s attempting to push it through. As finance chair for the Council, Burgess headed the oversight board for the city employees’ pension fund, so he is well versed in the issues surrounding retirement accounts.
The legislation is intended to create the opportunity for every worker in Seattle to have a retirement savings account that allows them to take advantage of the tax benefits afforded to such accounts. As written, the bill requires all private employers who have been in business for longer than two years and don’t offer a retirement plan of their own to make the city’s retirement savings program available to their employees. Employers would not be allowed to contribute to their employees’ retirement accounts, as many employers do today in the form of matching funds, but they would be required to deduct from their employees’ paychecks an amount set by each employee and deposit those funds in their city-run retirement accounts. Such deductions are made pre-tax and pre-withholding, reducing employees’ federal tax liability. Also, once in the retirement fund the accumulated investment returns would be tax-deferred until the money is withdrawn.
Employers would be required to offer the city-run retirement savings plan to their workers, along with a set of documents explaining the program and the financial risks of investing. The legislation suggests that employees would be automatically enrolled at a default contribution level unless they explicitly opt out.
The proposed retirement plan is a “defined contribution” plan, rather than a “defined benefit” plan, following the current trend. Defined benefit plans (like Social Security) guarantee a specific payout upon retirement, and employee contributions are invested and managed by the fund administrator to meet the financial obligations of those payouts. Defined contribution plans allow individuals to choose their own investment options, and the payout upon retirement is based upon how those investments fared in the market.
The proposed plan would offer several investment options, including three “core” diversified options and at least one that “is guided by social responsibility.” The expectation in the legislation is that they will be “pooled investment vehicles” that are generally available in the marketplace such as mutual funds, index funds, exchange-traded funds, etc. To avoid the conflict of interest, the retirement fund administrators may not require any of the investment funds to make any investment in the city’s bonds or other debt instruments.
The legislation also clearly mandates that the retirement plan funds may not be transferred into city coffers or used for any purpose other than the retirement plan’s purposes and administration. This avoids the situation the federal government has with the Social Security program, where Congress has siphoned money out for decades to fund other programs and has left the program underfunded for the defined benefits it is required to pay out. By being a defined contribution program and off-limits for other city spending, the retirement plan would not run the risk of becoming unable to meet its payout obligations.
The retirement plan would be managed by a Board of Administrators, consisting of:
- the Chair of the Council’s Finance Committee;
- the city’s Director of Finance;
- The Executive Director of the Seattle City Employees’ Retirement System;
- a city representative with experience in investments;
- a public representative of participating employees;
- a public representative of participating employers;
- a public representative with investment or retirement plan management experience.
The board members would be appointed by the Mayor and confirmed by the Council.
Many details are intentionally (and rightfully) left out of the legislation, left up to the appointed Board to resolve through a rulemaking process. Among them:
- what the minimum number of employees should be for an employer to be required to participate in the retirement plan;
- how to handle people who are self-employed, employed part-time, hold more than one job, don’t qualify for their employer’s own retirement plan, or work for an employer that is too small to participate;
- which of the various government-sanctioned retirement plan schemes (e.g. IRA, Roth IRA, 401(k)) should the retirement plan adhere to;
- hiring a financial institution to administer the program;
- setting the “management fee” overhead rate for the program;
- setting minimum, maximum, and default contribution rates;
- specifying the process for an employee to opt out of the program;
- sorting out whether an employee can “pause” contributions for a while;
- deciding how often employees can change their contribution level and their investment options;
- setting procedures for withdrawing funds from the program, including before retirement (federal law allows for funds to be withdrawn early from retirement accounts under certain conditions, sometimes with financial penalties).
The legislation doesn’t specify what rulemaking process the retirement plan must use to answer all of these questions, though since it is a public entity one can assume it will be a public process. There would also need to be a public education process for both employers and employees.
The bill requires that the program be set up and running no earlier than January 1, 2019, and no later than January 1, 2021.
If the Council were to take up the legislation in December when the 2018 budget is done, it would likely be routed through the finance committee. That committee used to be headed by Burgess before he moved to the Mayor’s office, and is now nominally headed by committee Vice Chair Lisa Herbold.
Normally after an election, the Council reshuffles its committee assignments with the seating of the newly-elected Council members in January. But since Burgess vacated his seat, either Teresa Mosqueda or Jon Grant will join the Council at the end of November instead. However, the Council is only in session for the first half of December before its holiday recess.
With all that churn, it seems unlikely that Burgess’ bill will see any airtime with the Council until January when new committee assignments are ironed out. UPDATE: A spokesperson for Council member Herbold tells me that the Council plans to introduce and consider this legislation as part of the budget package, so if all goes according to plan it will be enacted by the end of November.