Cecily O'Connor
RedwoodAge.com

California lawmakers may create the nation's first portable individual retirement savings accounts that would be especially valuable for millions of workers in small businesses.

The measure, Assembly Bill 2940, calls for the $230 billion California Public Employees Retirement System (CalPERS) to manage a separate investment program for private workers. It passed the state assembly in late May, inching closer to tackling key retirement savings problems: access to a savings plan and low participation rates.

"Under my bill, CalPERS would create the California Employee Savings Program, CalESP, providing voluntary, secure and completely portable supplemental retirement savings accounts that workers can freely take from job to job without penalty, prepare them for their retirement," Assemblyman Kevin De Leon, author of the bill, told RedwoodAge.com.

The state's legislators took up the measure in committee on Monday and could act on the bill as early as Thursday.

In California, about 6 million workers representing 43 percent of the state's workforce are in jobs that don't offer a pension or retirement savings plan to supplement Social Security. Those California workers are part of a national pool of 78 million workers that don't have access to an employer-sponsored plan.

California is among several other states, including Washington and Connecticut, interested in allowing private-sector employees to benefit from state government's ability to pool small employers to make retirement saving easier.

Federal Efforts
Interest also has been brewing at the national level in automatic individual retirement accounts (IRAs) under a plan proposed by Mark Iwry, non-resident senior fellow at the Brookings Institution and David John, a senior research fellow at the Heritage Foundation. Iwry and John are both principals of the nonpartisan Retirement Security Project, a joint venture of Brookings and Georgetown University, supported by the Pew Charitable Trusts.

Like California's proposed program, the bipartisan federal bill, co-sponsored by senators Jeff Bingaman and Gordon Smith and representatives Phil English and Richard Neal, would make it easy for employees in smaller companies to save a portion of their wages in their own tax-favored account. 

Both strategies combine three familiar building blocks from the current private pension system: payroll deposit, automatic enrollment, and IRAs, which are an established savings vehicle, Iwry said. 

These vehicles have the potential to help increase retirement savings - especially the nest eggs of moderate- and low-income workers - at a time when the economic climate is heightening concern about being financially prepared for retirement.

Auto-enrollment, a 401(k) feature that enables employers to enroll employees unless the employee chooses to opt out, could also go a long way toward boosting IRA participation should the state or federal proposals pass. 

"The automatic universal IRA would extend this inertia-busting strategy from the 401(k) space to most of the 78 million American workers who have no employer plan," Iwry said. 

Workers over 50 who are behind in their savings would continue to benefit from the catch-up provision that applies to traditional IRAs, too. That means they could invest up to an additional $1,000 beyond the current annual $5,000 contribution limit. 

'Pilot Project'
If the California bill passes this month, and other states move forward with their own legislation, there may be more incentive at the federal level to enact the automatic savings account program, Iwry said. 

"The state efforts can be viewed as a pilot project or lab for this sort of strategy," he said. "The possibility of one or more states moving forward could encourage Congress to act.” 

While Iwry doesn't expect Congress to act on the federal proposal before the November election, he did note automatic IRAs have received "favorable attention" in connection with the presidential campaigns. 

Presidential hopeful Barack Obama endorsed automatic IRAs in his campaign. While McCain has not spoken specifically about this issue, Iwry said he and Mr. John are "hopeful this is something Senator McCain would support."