BILL ANALYSIS Ó
Senate Committee on Labor and Industrial Relations
Ted W. Lieu, Chair
Date of Hearing: April 25, 2012 2011-2012 Regular
Session
Consultant: Gideon L. Baum Fiscal:Yes
Urgency: No
Bill No: SB 1234
Author: De Leon
As Introduced/Amended: April 17, 2012
SUBJECT
Retirement savings plans.
KEY ISSUE
Should the Legislature create a state-administered retirement
savings program to supplement social security income or other
retirement accounts?
PURPOSE
To provide a state-administered retirement savings program
similar to a cash-balance program for workers who lack access to
an employer-provided retirement plans.
ANALYSIS
Existing Federal law establishes, through the Social Security
Act (SSA), a social insurance program for the aged. This
program, frequently referred to as Social Security, is funded
through mandatory payroll paid by the worker and withdrawn at
the time of retirement. The benefit amount is set by the
earnings of the worker, as well as at what age the worker
retired.
Existing Federal law allows individuals to save for retirement
on a pre-tax basis through payroll deductions when the employee
is eligible to enroll in an employer-sponsored retirement
savings plan.
Existing law establishes the California Public Employees'
Retirement System (CalPERS), which is run by a Board of
Administration and oversees the Public Employees' Retirement
Fund, a trust fund created, and administered solely for the
benefit of the members and retired members of this system and
their survivors and beneficiaries. (Government Code
§§20000-23000)
Existing law also empowers CalPERS with exclusive authority and
fiduciary responsibility to invest the Public Employees'
Retirement Fund in order to ensure the payment of benefits for
members and their survivors and to control costs for
participating employers. (Government Code §§20120-20138)
This bill establishes a "California Secure Choice Retirement
Savings Trust" (Trust) for the purpose of promoting greater
retirement savings for California private employees in a
convenient, voluntary, low-cost, and portable manner.
This bill requires that the Trust will be administered by the
"California Secure Choice Retirement Savings Investment Board"
(Board), which must consist of Treasurer, the Director of
Finance, the Controller, an individual with retirement savings
and investment expertise appointed by the Senate Committee on
Rules, a small business representative and a public member each
appointed by the Governor, and an employee representative
appointed by the Speaker of the Assembly. The Treasurer shall
serve as chair of the Board.
The Board must, among other things, do the following:
a) Administer the Trust;
b) Annually prepare and adopt a written statement of
investment policy. The board shall consider the statement
of investment policy and any changes in the investment
policy at a public hearing.
c) Approve an investment management entity or entities;
d) Place on file for public inspection a report with
respect to investments made and of deposits in financial
institutions; and
e) Receive from the investment manager a monthly report on
the status of the investments, where the investments and
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located, and how these investments comply with the
investment policies set by the Board.
This bill would also require the Board to segregate the Trust
into separate funds, an administrative fund and a program fund.
Transfers can be made from the program fund to the
administrative fund as needed, but requires such transfers to be
capped at 1% of the total fund on an annual basis.
This bill provides that Gain and Loss Reserve Account must be
established within the Program Fund to maintain a reserve that
would cover a particular year's guaranteed return if actual
investment returns are insufficient.
This bill would require that the Trust offers a "California
Secure Choice Retirement Savings Program" (Program), which would
be one or more payroll deposit retirement savings program
arrangements.
This bill sets the following parameters for the Program to
operate within:
i. Program accounts shall be nominal accounts;
contributions must be treated as credits to the
individual's account along with interest and any
additional earnings on the account. The individual shall
not have a specific right or claim to any specific assets
of the account.
ii. Upon termination of coverage by the Program, the
balance of credits in the individual's account shall
determine the amount to which the individual is entitled.
iii. Prior to July 1 of each plan year, the Board shall
set the rate of interest for the subsequent year, and
interest shall be credited to plan accounts based on
credits in the account and compounded daily.
iv. An individual's retirement savings shall be equal to
the credits in the account on the date the retirement
savings benefit becomes payable.
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This bill provides the following requirements and obligations
for participating employers and employees, after the Board opens
the Program to participants:
i. Any employer may participate in the Program;
ii. Any employer with more than 5 employees that does not
offer an employer-sponsored retirement plan must
participate in the Program;
iii. Unless other specified by a participating employee, the
employee must contribute 3% of the employee's annual salary
or wages. The Board by regulation may adjust this
contribution level within a band of 2-4% of annular salary;
iv. Provides an opt-out process with Employment Development
Department (EDD) for any employee that does not wish to
participate, with a renewal every 24 months;
v. All eligible employers must provide a payroll deposit
retirement savings arrangement to forward the employees'
contributions to the Program. Employers may also
contribute to the Program on behalf of employees, but such
contributions are to be voluntary;
vi. Employers retain the ability to set up an
employer-sponsored retirement plan instead of participating
in the Program;
This bill empowers the Board to establish a process by which an
eligible employer is able to forward employee contributions
through a payroll deposit to either the Program or its agents.
This bill empowers the Board to establish a process by which an
individual or employee not employed by an eligible employer is
able to participate in the Program.
This bill provides the following timeline for rolling-out the
Program:
a) Beginning 3 months after the Program is open to
enrollments, employers of 100 or more must make the Program
available;
b) Beginning 6 months after the Program is open to
enrollments, employers of 50 or more must make the Program
available;
c) Beginning 9 months after the Program is open to
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enrollments, employers of 5 or more must make the Program
available.
This bill provides that employers who, without good cause, fail
to make the Program available to their employees on or before 90
days after notice has been given of failure to comply, shall be
assessed a penalty of $1,000 per employee not offered the
retirement savings Program by the Employment Development
Department (EDD).
This bill excludes federal employees and employees covered by a
collective bargaining agreement that expressly provides for an
employee pension benefit plan from the definition of an eligible
employee.
This bill provides for auditing procedures, as well as
additional procedures to ensure that the State will not incur
debt or liabilities from the Program.
This bill would require the Board to initially conduct a market
analysis to find if the necessary conditions exist to implement
the Program.
This bill requires that the provisions of this title shall only
become operative if funds are made through private, non-profit
or federal funding sufficient enough to allow the Board to
study, develop, and implement the title, and the Board notifies
the Department of Finance that the provisions of the title can
be self-sustaining.
This bill makes various findings and declarations about the need
to save for retirement and threats to individuals and the State
posed by insufficient savings for retirement and individuals'
inability to retire, and states that creation of the California
Secure Choice Retirement Savings Trust constitutes the carrying
out of a valid and vital public trust.
COMMENTS
1. Need for this bill?
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The American retirement system has unique relied on a "three
legged stool" model: Social Security benefits, private
savings, and employer-provided pensions. This model,
therefore, required a significant employer-based retirement
component, which was largely through a defined benefit
pension, which is a pension where the benefit was defined by
the service and final wages of the employee. As recently as
25 years ago, more than 80% of large and mid-sized companies
offered a defined benefit pension. Today, less than a third
do, making defined benefit pensions largely a public employee
phenomenon.
What have largely taken the place of employer-sponsored
defined benefit pensions are employer-sponsored defined
contribution pensions, such as 401(k) and 457 retirement
plans. With defined contribution plans, the employee makes all
of his or her own decisions about how the funds are invested,
taking on the entirety of the risk of his or her retirement.
While these plans are portable and have tax advantages, the
nature of the risk shift leaves workers with the sole
responsibility of making investment decisions, which they may
or may not be prepared for, and leaves retirement nest-eggs
vulnerable to shifts in the stock market.
Additionally, while the shift from employer-sponsored defined
benefit pensions to employer-sponsored defined contribution
pensions has received a fair amount of attention, what has
received less press coverage is that a large number of
employees currently have do not have access to
employer-sponsored retirement plans at all. This undermines
the historical "three legged stool" retirement system America
has relied on since the passage of the Social Security Act in
1935. This problem is severe in California, and it is
particularly severe for California's middle class and
lower-middle class retirees and employees of small-businesses.
According to a recent UC Berkeley study, 52% of Californians
have access to employee-sponsored retirement plans and 44% of
California's workers choose to participate in these plans
(nationally, the rate is 58.1% and 49%, respectively).
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However, such an aggregation masks disparities among firm
sizes. For firms with 1,000 or more employees, 75.4% of the
firms offer access to employer-sponsored retirement plans, and
more than 65% of the workers chose to participate in the
plans. For firms that are 25 employees or less, only 19.7% of
the firms offer an employer-sponsored retirement plan and only
16.5% of workers employed by firms of that size actually
participate in these plans.
Similarly, there are significant disparities among
upper-middle class retirees and middle class and lower-middle
class retirees when it comes to the sources of income
available retirees. According to the same UC Berkeley study,
the mean total income for retirees in California is $25,984;
43.5% of the income comes from Social Security and 38.9% of
the income comes from retirement funds, dividends, and rental
income. However, when the data is disaggregated, significant
disparities can be seen:
a) For retirees in the bottom 25% of income brackets,
the mean total income for retirees is $6,902; 79.1% comes
from Social Security and 4.8% comes from retirement
funds, dividends, and rental income.
b) For retirees in the middle 50% of income brackets,
the mean total income for retirees is $18,145; 70.3%
comes from Social Security and 18.9% comes from
retirement funds, dividends, and rental income.
c) For retirees in the top 25% of income brackets, the
mean total income for retirees is $60,713; 23.4% comes
from Social Security and 54.8% comes from retirement
funds, dividends, and rental income.
SB 1234 seeks to address the challenge of retirement
disparities in terms of income and access by mandating, for
employees that do not have access to an employer-provided
retirement, access to a retirement program that would function
similar to a cash-balance plan, limiting risk and the need for
sophisticated financial knowledge. This bill would also allow
individuals to participate in the plan as well.
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2. How Would the "California Secure Choice Retirement Savings
Program" Work?
In terms of retirement products currently in use, the Program
would most closely follow the structure of a cash-balance
retirement plan. With a cash-balance retirement plan, the
plan tries to bring in components of defined benefit and
defined contribution plans by providing a guaranteed benefit,
but tying that guaranteed benefit to the balance in the
account. In short, it tries to blend the best of both defined
benefit and defined contribution plans.
With typical cash-balance plans, a participant's account is
credited each year with a "pay credit" (such as 5 percent of
compensation from his or her employer) and an "interest
credit" (either a fixed rate or a variable rate that is linked
to an index such as the one-year Treasury bill rate). With
this bill, the employee puts his or her own compensation into
the Program, rather than a payment from the employer. The
Board would then have the responsibility of setting an
interest rate/credit on an annual basis.
Similar to the CalSTRS cash-balance retirement plan, this bill
also requires the creation of a Gain and Loss Reserve Account,
which brings in money during good years and disburses money
during bad years in order to credit the rate of interest set
by the Board. Such decisions would be based on an annual
actuarial valuation. Additionally, this bill requires the
Board to purchase insurance against any loss and secure
underwriting to insure that the benefits are paid to
participants.
The actual day-to-day operation of the Program is left largely
unspecified in the bill. There are allowances for the
appointment of a Program Administrator and staff, but there is
also the flexibility to retain or contract with CalPERS and/or
private financial institutions "as necessary". Finally,
there's also a catch-all to allow for collaboration with
CalPERS and private entities for outreach and administration.
3. How Many Workers Could Participate in the "Program"?
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As discussed above, a recent UC Berkeley study pegged the
number of employees that do not have access to
employer-sponsored retirement plans to 48% of all of
California's workers, or using recent EDD workforce numbers,
approximately 7.9 million workers . This can be seen as a
rough estimate of the number of workers who would be eligible
to participate and would need a waiver to opt-out. As this
number does not include unemployed workers or individuals who
have access to an employer-sponsored retirement account but
would also want to participate in the Program or eligible
workers who would opt-out from participating in the Program,
this may not fully capture universe of participants.
4. Possible Amendments:
In the recent amendments for SB 1234, a paragraph was added on
page 8, lines 1-6, that addresses contributions to the Trust
and limits their use only to the payment of benefits,
administration, and investments. This paragraph, however, was
placed in the section of the bill (Section 100004.5) that
addresses with the Gain and Loss Reserve Account. It may make
more sense for that paragraph to instead be included at the
end of the description of the operation of the Trust (Section
100004) on page 7, between lines 8 and 9. Therefore, the
Committee may wish to strike and move this paragraph as
described above.
Additionally, SB 1234 provides that copies of the market
analysis to determine if the whether the necessary conditions
for implementing the Program exist must be sent to the Chair
of the Senate Committee on Public Employment and Retirement
and the Chair of the Assembly Committee on Public Employees,
Retirement and Social Security (page 16, lines 4-16). The
Committee may wish to include the Chair of the Senate
Committee on Labor and Industrial Relations as a mandatory
recipient of the market analysis.
5. Topics of Further Discussion:
While SB 1234 largely addresses the structure of the
California Secure Choice Retirement Savings
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Board/Trust/Program, there are several topics that may require
further discussion prior to the conclusion of the legislative
process for SB 1234:
a) The Withdrawal of Funds from the Program
Currently, SB 1234 provides that an individual may withdraw
his or her funds from the Program "upon termination of
coverage by the plan" (page 9, line 2). It is not
absolutely clear what that means. Would a worker who
decided to opt out from the Program be able to withdraw his
or her contributions? What if the worker was terminated or
quit? Would there be any age restrictions on withdrawals?
What about hardship or emergency withdrawals?
b) Additional Protections for the State from Liability:
Currently, SB 1234 provides protection for the State from
liability due to the activities of the Trust through
insurance and private underwriting. Is that sufficient?
Is there room for inappropriately short-sighted thinking in
setting Gain and Loss Reserve Account goals? What if the
Board ignores actuarial advice and pushes for an aggressive
target in a bull market? What would happen if the Trust
became insolvent?
c) The Decision to Make the Program Available:
Currently, the process for the Board deciding to make the
Program available for contributions is currently quite
vague. SB 1234 requires that the provisions only become
operative if funds are made through private, non-profit or
federal funding sufficient enough to allow the Board to
study, develop, and implement the title, and the Board
notifies the Department of Finance that the provisions of
the title can be self-sustaining.
What if the Program is found to not comply with Employee
Retirement Income Security Act (ERISA) after
implementation? Would the State be looking for the
Pension Benefit Guaranty Corporation (PBGC) to guarantee
the Program? What if the Internal Revenue Service (IRS)
refused to grant the Program a similar tax status as other
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retirement plans enjoy? Should any/all of these issues
halt/impact implementation?
6. Proponent Arguments :
The author and supporters argue that, due to inadequate
retirement savings, nearly 50% of middle-income California
workers will face living in or near poverty during their
senior years. Supporters believe that Social Security
payments alone are simply not enough to cover basic life
necessities, and over seven million workers in the private
sector currently do not have access to a retirement savings
plan through their jobs.
Proponents note that the proposed California Secure Choice
Retirement Savings Plan would be a cash balance-type plan,
similar to the Defined Benefit Supplement Program currently
offered by the California State Teachers' Retirement System
(CalSTRS). Proponents note that this type of retirement
savings plan has a guaranteed rate of return, and that the
guaranteed benefit would be closely tied to the Treasury-bond
(T-bond) rate, which is modest yet superior to the interest
rate currently offered by regular savings accounts.
Proponents also note that that the proposed California Secure
Choice Retirement Savings Plan would be governed by the
California Secure Choice Retirement Savings Investment Board,
a statewide governing board chaired by the State Treasurer,
and that this board is modeled after ScholarShare,
California's 529 College Savings Plan, which is a
professionally-managed fund that has grown to over $4.4
Billion in assets and offers families an opportunity to build
savings to cover the costs of higher education.
7. Opponent Arguments :
Opponents state the following:
"We are concerned about the operational questions and
potential liability issues the legislation creates. Employers
are uncertain as to how they would interface with the newly
created state entity."
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"The effort, liability and expense of SB 1234 are unnecessary
given that California already has a robust and highly
competitive retirement savings market. California financial
services firms - which directly employ 536,000 workers in the
state and indirectly employ countless others - currently offer
a wide variety of retirement savings alternatives, including
401(K) plans, 403(b) plans, 401(a) plans, 457(b) plans, SIMPLE
3 IRAs, SEP IRAs, and traditional IRAs. Smaller employers and
individual employees tend to gravitate to IRAs because they
are low-cost, straightforward and easy to administer.
SB 1234 would create a new state-run structure that would
directly compete for business with a wide range of California
financial services firms and retirement plan providers. This
would directly affect the livelihoods of securities firms and
individual brokers, insurance and life insurance companies and
individual agents, plan providers and their employees, and
others in the financial services industry."
8. Prior Legislation :
AB 125 (DeLeon) of 2009 would have created a California
Employee Savings Program that would have been administered by
CalPERS. This bill was held by the Senate Committee on
Appropriations.
AB 2940 (DeLeon) of 2008 was nearly identical to AB 125 of
2009. AB 2940 was held by the Senate Committee on
Appropriations.
SUPPORT
AARP California
American Federation of State, County and Municipal Employees
(AFSCME), AFL-CIO
Association of California School Administrators
California Association of Psychiatric Technicians
California Faculty Association
California Professional Firefighters
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Senate Committee on Labor and Industrial Relations
California School Employees Association
California Teachers Association
Congress of California Seniors
EARN
Faculty Association of California Community Colleges
Latinos for a Secure Retirement
National Conference on Public Employee Retirement Systems
National Hispanic Council on Aging
TELACU
The Greenlining Institute
OPPOSITION
American Council of Life Insurers
Association of California Life and Health Insurance Companies
California Chamber of Commerce
California Grocers Association
California Independent Grocers Association
California Manufacturers and Technology Association
California Retailers Association
California Small Business Association
Financial Services Institute
Garden Grove Chamber of Commerce
Howard Jarvis Taxpayers Association
Insurance Brokers and Agents of the West
Investment Company Institute
Long Beach Area Chamber of Commerce
National Association of Insurance and Financial Advisors of
California
National Federation of Independent Business
Pacific Life Insurance Company
Plumbing-Heating-Cooling Contractors Association of California
Securities Industry and Financial Markets Association
Small Business California
The Financial Planning Association
Western Electrical Contractors Association
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Senate Committee on Labor and Industrial Relations
Hearing Date: April 25, 2012 SB 1234
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Senate Committee on Labor and Industrial Relations