BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
125 (De Leon)
Hearing Date: 8/27/2009 Amended: 6/18/2009
Consultant: Maureen Ortiz Policy Vote: PE&R 4-2
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BILL SUMMARY: AB 125 creates the California Employee Savings
Program to be administered by CalPERS designed to offer
individual retirement accounts (IRAs) to employees of
private-sector or non-profit employers that do not otherwise
provide access to retirement savings plans.
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Fiscal Impact (in thousands)
Major Provisions 2009-10 2010-11 2011-12 Fund
CalPERS $845
$845 $1,200 General
EDD $23,952
$14,725 $14,718 General
potentially offset
by fees
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STAFF COMMENTS: SUSPENSE FILE.
Although the intent of AB 125 is for the program to be
self-funded and have the costs fully covered by fees deducted
from participants' IRA contributions, the feasibility of that
funding will depend on the level of participation, as well as
the amount of assets in the program. Therefore, it would most
likely be necessary for the State to appropriate or loan funds
to CalPERS and EDD to cover their costs for the study phase, the
start-up phase and an initial period of operations until the
program can sustain itself. AB 125 allows donations from
nonprofit or private entities, as well as federal funding, for
these purposes. Since the existing CalPERS Defined Benefit Plan
is a pension plan qualified under Section 401(a) of the Internal
Revenue Code, its assets may only be used for the exclusive
benefit of the employees or the beneficiaries of the employers
sponsoring the plan. Therefore, to ensure that existing assets
will not become liable for the funding of this new program, AB
125 specifically prohibits CalPERS from using any funds in the
defined benefit plans, health and welfare plans, deferred
compensation plans, or any other plan administered for state and
local governments to study, initiate, develop, implement or
administer an IRA program established pursuant to this bill. AB
125 provides that funding must first be made available before
the commencement of the feasibility study.
CalPERS estimates startup costs of $1.69 million over a period
of 24 months which includes approximately $75,000 to conduct a
market survey to determine likely participation rates, potential
contribution levels and the rate of account closures and
rollovers; approximately $500,000 to secure the services of
outside tax and securities counsel to obtain necessary federal
regulatory approvals; and approximately $1.2 million for 10.4
PYs to carry out such tasks as program design, identifying
customer service, participant education, systems automation,
accounting, auditing and financial
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AB 125 (De Leon)
reporting costs, developing and administering requests for
market survey and legal services, and potential costs for
third-party administrator, trustee, investment and marketing
service providers. In addition to the above cost estimate,
CalPERS would incur another $250,000 to $500,000 in legal
expenses if the board were to seek approvals for authorized
ERISA-regulated SIMPLE and SEP IRAs.
CalPERS will be allowed to completely develop and administer the
program in-house, contract out with a third party, or to use a
combination of the two approaches.
AB 125 provides that all expenses of the program will be funded
by contributions to or investment returns of, the program, but
also allows for funding appropriated by the Legislature. The
bill creates the California Employee Savings Program
Administrative Fund for these purposes, continuously
appropriates the money in that fund, and also authorizes CalPERS
to establish multiple accounts within the fund in order to
allocate moneys for various program needs. It will be important
for the IRAs to maintain administrative costs at a level that
participants are willing to bear through fees charged either as
a percentage of assets in their accounts, or through a fixed
annual fee. It should be noted though, that when participants
are allowed to make contributions in very small amounts, the
plan administrative costs may consume a large percentage of
their assets, thereby, actually discouraging participation.
Another important consideration is whether the IRA assets could
be effectively separated from CalPERS' governmental assets in
order to prevent the possibility of interference with its
current exemption from ERISA.
Employment Development Department (EDD)
AB 125 authorizes CalPERS to use the current tax processing and
accounting system of the EDD, or to use either a financial
services company or a third-party administrator that has the
capability to receive and process employee information and
contributions for payroll deduction IRA arrangements. However,
if EDD is selected by the CalPERS board, it must participate in
the implementation and administration of the program.
EDD has estimated the following costs based on the premise that
it will act as a pass-through entity from employers to CalPERS.
The estimate does not reflect any costs for collection and
enforcement activities, nor the reconciling of information
through EDD's processing and accounting areas.
For FY 2009/10, EDD anticipates one-time costs of approximately
$17.9 million in addition to $6 million for 60 PYs. During FY
2010/11, one-time costs will be about $363,000, but ongoing will
increase to $14.4 million to support approximately 125 PYs.
These costs include the procurement of a new database system to
store employer and employee data, accounting error suspense,
on-line corrections, transfers, activation and in-activation,
data retention and removal. Also needed are new software,
servers, and imaging updates in order to facilitate new workload
requirements.
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AB 125 (De Leon)
The anticipated workload for EDD is based on the assumption that
fifty percent of employers will file by paper, and fifty percent
will use electronic methods.
AB 125 specifically authorizes EDD to charge a fee for any
administrative costs it incurs. However, it will be likely that
General Fund expenditures will be necessary to fund the
development and implementation of the withholding program, as
well as part of the ongoing costs, if EDD is unable to generate
a sufficient administrative fee. Funds received for the CalESP
program must be kept separate and may not be commingled with
existing funds for UI, DI, Employment Training Tax, Personal
Income Taxes, and Contingency Funds. Therefore, it may be
necessary to create a special fund or account for receipt of
fees or other sources of revenue.
Study
AB 125 requires CalPERS to conduct an economic feasibility study
to determine whether the necessary conditions for implementation
can be met. This market survey will include such items as
participation rates, participants' comfort with various
investment vehicles and degree of risk, contribution levels, and
to what extent participants will close accounts and/or rollover
funds. The study will not commence until sufficient funds are
made available through a nonprofit or private entity, federal
funding, or an annual Budget Act appropriation. Upon completion
of the study, the Board will present its finding to the
Legislature for review.
Approval Phase
After completion of the study and concluding that the IRA
program is in fact feasible, CalPERS will then need to request
funding through either a Budget Act appropriation, donations, or
federal funding for obtaining all necessary approvals, and then,
for designing the program. Approvals, rulings, determinations
from federal entities include the IRS, Department of Labor, and
the Securities Exchange Commission. CalPERS will report to the
Legislature after these two tasks are completed.
Implementation
Upon completing the study, obtaining all federal approvals, and
designing the IRA program, CalPERS will then be required to
request funding for implementation. This funding will also come
from an appropriation in the annual Budget Act, donations from
nonprofit or private entities, or from federal sources. AB 125
provides that implementation may not begin until adequate
funding sufficient to fund program development, implementation
and administrative costs are obtained, and requires that the
program must be self-sustaining after implementation. The
CalPERS board must file a report with the Legislature at this
time that includes the following: 1) information regarding the
expectations of the program, 2) an outline of the program, and
3) details relating to the administration and projected cost of
the program. AB 125 specifies that implementation may not begin
until this report is completed, and until the funds for the
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AB 125 (De Leon)
projected cost of the program are appropriated by the
Legislature in an Annual Budget Act.
After implementation has begun, the board will be required to
submit annual reports to the Legislature relating to the status
of the program including outreach, investments, and solvency
efforts. In addition, the board must submit a report to the
Legislature 90 days prior to discontinuing or suspending the
program for any reason.
Defined Benefit Plan
In addition to the IRA program, AB 125 requires CalPERS to
conduct a feasibility study of creating a defined benefit plan
option, develop, and obtain the necessary federal approvals for
implementation if funds are made available for this purpose
through the annual budget act, private donations, or from
federal sources. It is unclear how a define benefit plan could
be established that would meet the portability requirements of
the program.
Specifically, AB 125 does the following:
1) Requires CalPERS to offer one or more IRAs including
traditional IRAs, payroll deduction IRAs, SIMPLE IRAs, or other
IRAs as specified. The CalPERS Board may select from among
several possible structures and features
2) Authorizes CalPERS to do the following:
a) employ staff,
b) retain and contract with private financial institutions,
other financial and service providers, consultants, third-party
administrators and other professionals as necessary, c)
collaborate with financial and business entities to reach an
effective and efficient design, implementation, and
administration of the program, and to maximize outreach to
eligible employers and employees,
d) pay all associated expenses from contributions to and
investment returns of the program or IRA plans,
e) facilitate compliance by the IRA plans with all requirements
under the Internal Revenue Code,
f) cause the IRA plans to be designed, established and operated
in accordance with best practices and to maximize participation
through the use of automatic features,
g) seek to minimize costs by facilitating the pooling of small
employers and individuals, h) arrange for collective, common,
and pooled investment of assets of the IRA arrangements to the
extent that such action does not jeopardize any current ERISA
exemptions as specified,
i) disseminate educational information concerning saving and
planning for retirement,
j) disseminate information to employers regarding potential tax
credits,
k) submit progress and status reports to participating employers
and employees,
l) determine employer and employee eligibility to participate in
the CalESP, and
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AB 125 (De Leon)
m) establish a process to enable employees to arrange payroll
deductions through their employers and to require employers to
forward contributions to the program.
CalPERS will be required to obtain all necessary approvals,
rulings, opinions, determinations, or confirmation from the
Internal Revenue Service, the Department of Labor, and the
Securities and Exchange Commission in order to ensure that all
plans established under this program adhere to requirements of
federal law.
AB 125 authorizes CalPERS to use the current tax processing and
accounting system of the Employment Development Department
(EDD), financial services companies, and third-party
administrators. It requires EDD to assist CalPERS to study and
implement the processing of payroll deduction authorizations.
AB 125 further authorizes EDD to charge a fee for administrative
costs for implementation and administration. However, the bill
does not designate the payer of that fee, whether it will be the
employer or employee.
Members of the CalPERS Board, state officers and employees, and
investment managers under contract with CalPERS will be
indemnified from the General Fund and held harmless by the
state, as specified.
Traditional IRAs - Include tax-deferred retirement savings
accounts whereby taxes are not paid on contributions and
investment earnings until withdrawal, and ROTH IRAs, where
contributions are made on an after-tax basis and are not subject
to taxes upon withdrawal. These IRAs are available whether or
not an individual is covered by another
retirement plan, however, the income tax deductibility of their
contributions may be affected if they or their spouse is covered
by an employer retirement plan. The contribution limit is $5000
for 2009. This is the maximum amount that can be contributed in
2009 regardless of whether the contributions are to one or more
traditional IRAs or whether all or parts of the contributions
are nondeductible. A traditional IRA is not sponsored by an
employer so the assets are not considered pension plan assets
subject to the Employee Retirement Income Security Act of 1974
("ERISA"), nor are the contributions made through payroll
deductions.
Payroll Deduction IRAs - These are for employers who do not want
to adopt a retirement plan, but still want to allow their
employees to save through payroll deductions. The decisions
about how much to contribute up to the $5000 limit, and when to
contribute are made by the employee. Although the limits and
the contributions to a payroll deduction IRA are tax-deductible
to the same extent as traditional IRAs, it provides a more
convenient and consistent means for the employee to make these
contributions. Depending upon how the payroll deduction IRA is
set up and level of endorsement by the employer, the IRA assets
may be subject to ERISA.
Savings Incentive Match Plans for Employees of Small Employers,
or SIMPLE IRAs - These are a savings option for employers with
100 or fewer employees that allow employees to contribute a
percentage of their salary each pay check and to have their
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AB 125 (De Leon)
employer contribute too. Under a SIMPLE IRA, employees can
contribute up to $10,500 annually. Employers can either match
up to 3 percent of an employee's wage or make a fixed
contribution. SIMPLE IRAs are considered pension plan assets
and are subject to ERISA.
Simplified Employee Pensions, or SEP IRAs - Allows employers to
set up an IRA for their employees. Employers are required to
contribute a uniform percentage of pay for each employee, but
they are not required to make contributions each year. An
employer may contribute up to 25 percent of an employee's
compensation up to the annual cap, which is $45,000 in 2008 and
subject to annual cost-of-living adjustments for later years.
SEP IRAs are considered pension plan assets and are subject to
ERISA.
Defined Benefit Plans - Employers and employees make
contributions to the plan, calculated as a percentage of
payroll, which are invested together to provide a fixed benefit
upon the employee's retirement.
The purpose of the California Employee Savings Program (CalESP)
is to provide retirement savings opportunities to employees who
do not have access to employer-sponsored plans in a convenient,
low-cost and portable manner. Employees who participate in this
program will not be construed to be members of the California
Public Employees' Retirement System.
Several other states have considered retirement savings
proposals similar to AB 125 including Connecticut, Maryland,
Michigan, Vermont, and Washington, however, none of those
proposals have been signed into law. Maryland and Washington
have recently conducted scoping studies. The study in Maryland
concluded that funding of between $300,000 and $500,000 would be
necessary for at least five to seven years before their program
could be self-sustaining. The state of Washington reported
startup costs of between $2.2 million and $3.4 million.
This bill is similar to AB 2940 (De Leon) which was held on this
committee's Suspense File last year.