BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Christine Kehoe, Chair SB 1234 (De Leon/Steinberg) - Retirement savings plans. Amended: May 2, 2012 Policy Vote: PE&R 3-1 L&IR 4-1 Urgency: No Mandate: No Hearing Date: May 24, 2012 Consultant: Maureen Ortiz SUSPENSE FILE. AS PROPOSED TO BE AMENDED. Bill Summary: SB 1234 creates a state administered retirement savings program for employees who lack access to an employer-provided retirement plan to be known as the California Secure Choice Retirement Savings Program. Employers with five or more employees will be required to offer the new retirement savings program to all employees according to a phase-in schedule. Employees will be required to opt out if they decline participation. SB 1234 will create a portable retirement savings program that employees who are not otherwise covered by a pension plan can make contributions to over their working careers. Fiscal Impact: Unknown costs for initial market analysis to determine the feasibility of the program. SB 1234 provides that these expenses will be funded from a nonprofit or private entity, federal funding, or an annual Budget Act appropriation. . Unknown, potentially over $1 million in start-up costs for promulgating regulations, market analysis and initial start-up expenses (Private/General) Unknown, multi-million annual administrative expenses to be paid from earnings on the trust. (Special) Approximately $465,000 in one-time costs for completing form revisions and mailing information packets for the Employment Development Department (Special Fund) Although the intent of SB 1234 is for the program to be self-funded and have the costs fully covered by investment earnings, the feasibility of that funding will depend on the level of participation, as well as the amount of assets in the program. Therefore, it will most likely be necessary for the State to appropriate or loan funds to cover the market analysis phase, the start-up phase and an initial period of operation SB 1234 (De Leon/Steinberg) Page 1 until the program becomes sustainable through earnings. SB 1234 allows donations from nonprofit or private entities, federal funding, or an annual Budget Act appropriations for these purposes. Staff notes that in similar bills that have come before this committee (AB 2940 De Leon in 2008, and AB 125 De Leon in 2009 which had required CalPERS to administer a similar program), CalPERS had estimated initial study costs at approximately $1.69 million over an implementation period of 24 months. These estimates included $1.2 million for 10.4 PYs to carry out the professional and administrative tasks associated with developing and evaluating various program elements including program design, identifying customer service, participant education, systems automation, accounting, auditing and financial reporting costs, conducting market survey, legal services, and likely costs for third-party administrator, trustee, investment and marketing service providers. The cost estimate also included approximately $75,000 to conduct the market survey to determine likely participation rates, participants' comfort with various investment vehicles and risk appetite, contribution levels, and the rate of account closures and rollovers. The estimate for obtaining tax and securities counsel to secure necessary federal regulatory approvals were estimated at $500,000. It is likely that expenses for the California Secure Choice Retirement Savings Program will be similar. The Employment Development Department has estimated one-time costs to revise the DE 4 (Employees Withholding Allowance Certificate), provide outreach to the employer community of approximately 800,000 employers and provide informational packets providing guidelines and instructions to employers of about $465,000. SB 1234 requires the board to initially conduct a market analysis to determine whether the necessary conditions for implementation can be met including likely participation rates, participants' comfort with various investment vehicles and degree of risk, contribution levels, and the rate of account closures and rollovers. The board may only conduct this analysis if sufficient funds are made available through a nonprofit or private entity, federal funding, or an annual Budget Act appropriation. SB 1234 (De Leon/Steinberg) Page 2 SB 1234 further provides that the implementation of the program will not occur until funds are made available through a nonprofit or private entity or federal funding in amounts sufficient to allow the board to study, develop, and obtain the approvals necessary to implement the program, and that the board has notified the Director of Finance that, based on its market analysis, the provisions of the program will be self-sustaining. Background: The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for retirement and health benefit plans in private industry. ERISA does not require any employer to establish a plan, but requires that those who establish plans must meet certain minimum standards. ERISA covers retirement, health and other welfare benefit plans (e.g., life, disability and apprenticeship plans). Among other things, ERISA provides that those individuals who manage plans (and other fiduciaries) must meet certain standards of conduct. The law also contains detailed provisions for reporting to the government and disclosure to participants, and contains provisions aimed at assuring that plan funds are protected and that participants who qualify receive their benefits. SB 1234 is patterned after The Secure Choice Pension program developed by the National Conference on Public Employee Retirement System as a program to enhance retirement security and income. According to the Employee Benefit Research Institute, the average American has a retirement savings deficit of approximately $48,000 with an aggregate national retirement savings shortfall of almost $4.6 trillion. Proposed Law: SB 1234 contains the following provisions: 1) Contains Legislative findings and declarations outlying the significance of California's workers' inability to participate in an employer sponsored retirement savings plan; SB 1234 (De Leon/Steinberg) Page 3 2) Creates the California Secure Choice Retirement Savings Investment Board to consist of the 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; 3) Defines the powers, duties, and obligations of the board, including preparing a written statement of investment policy and considering the policy at a public hearing. The board will appoint a program administrator, employ staff, retain and contract with the CalPERS board, private financial institutions, other financial and service providers, consultants, actuaries, counsel, auditors, third-party administrators and other professionals as necessary, as well as numerous other duties relating to the administration of the trust; 4) Establishes the California Security Choice Retirement Savings Trust, continuously appropriates the money in the trust and separates it into the Program Fund and the Administrative Fund; 5) Provides that all administrative expenses will be paid from earnings of the trust, transferred from the program fund, but limits expenditures from the administrative fund to one percent of the total program fund; 6) Provides that all contributions paid by employees and employers into the trust will be used to pay benefits to participants, to administer the program, and to make investments for the benefit of the program; 7) Gives the California Public Employees Retirement Board the power to administer funds in the trust pursuant to a contract with the California Secure Choice Retirement Savings Investment Board; 8) Provides that the moneys in the program fund may be invested by the Treasurer or under contract with the SB 1234 (De Leon/Steinberg) Page 4 CalPERS Board of Administration or private money managers as determined by the board; and, 9) Establishes the initial employee contribution rate at 3% of the employee's annual salary or wages, but the board may adjust that rate to any rate between 2%-4%, and authorizes employers to also make contributions. The California Secure Choice Retirement Savings Program shall include one or more payroll deposit retirement savings arrangements. Individual accounts will be nominal accounts and any contributions will be treated as credits to the participating member's account, together with interest. The balance of credits in an individual's account will determine the amount which he or she is entitled to upon termination of coverage by the program. The program will be portable whereby employees can continue to contribute uninterrupted if they change jobs throughout their working career and be assured of a constant benefit upon their final retirement in addition to social security and other savings/investment options. The Employment Development Department (EDD) will be required to revise its exemption certificate to create an option for an eligible employee to note his or her decision to opt out of the California Secure Choice Retirement Savings Program effective January 1, 2014. Employers will be subject to a $1,000 penalty for each eligible employee that the program is not offered to, enforced by the EDD. Additionally, SB 1234 requires the establishment of a Gain and Loss Reserve Account which may be used to credit interest for program years in which the board determines that the stated interest rate cannot be met from investment earnings. The board will establish a goal for the balance of the reserve account and may allocate excess earnings of the program to the reserve account based on consideration of the following: Whether or not the plan has excess earnings; The sufficiency of the Account in relation to the board's goal for the Account; The amount required for the program's administrative costs; and SB 1234 (De Leon/Steinberg) Page 5 The amount required for crediting individuals' accounts at the stated interest rate. Before establishing the program, the board will need to adopt regulations consistent with the federal Internal Revenue Code to ensure that the program meets all criteria for federal tax-deferral or tax-exempt benefits. SB 1234 also requires the board to submit an annual audited financial report to the Governor, the Controller, the State Auditor, and the Legislature. Eligible employees will be able to opt out of the program by making a notation on the exemption certificate provided by the Employment Development Department (EDD), but the bill provides for an automatic re-enrollment after 24 months at which time the employee may again opt out. Employers who do not wish to offer the California Secure Choice Retirement Savings Program may at any time offer employees an alternative plan such as a 401(k) plan. Staff Comments: Upon establishment of the California Secure Choice Retirement Savings Investment Board, following are sample items that must be considered before actual implementation of the program: a) How long will the program need to be operational before earnings are sufficient to support the administrative expenses of the program as required in the bill? b) Where will the administrative funds come from in the meantime? c) Is the 1% cap for administrative expenses too low? d) What fees will be charged to employees who choose to participate including potential premiums to the Pension Benefit Guaranty Corporation for insurance in the event the plan terminates with insufficient assets, and providing that employers do not pay these costs? d) What safeguards will be in place to ensure adherence to ERISA minimum funding guidelines? SB 1234 (De Leon/Steinberg) Page 6 e) What will the terms of distribution of the funds be to contributing employees upon retirement including the form of benefits such as lifetime annuities and whether to offer death or disability benefits? SB 1234 authorizes the Investment Board to retain and contract with the Board of Administration of CalPERS and/or to collaborate with the CalPERS board for assistance with the design, implementation and administration of the program. It should be noted that if a collaborative relationship is established between the new Investment Board and CalPERS, any expenses incurred by CalPERS will need to be reimbursed as that system will not be able to use any funds in the Public Employees Retirement Fund for purposes of this new statewide program. SB 1234 exempts the state from any liability for the payment of the retirement savings benefit which is guaranteed to program participants. Any financial liability for the payment of benefits in excess of funds available under the program shall be borne by the underwriters pursuant to the contract entered into with the board on behalf of the program participants. Ultimately, a secure private sector retirement program will decrease existing and future costs to state and local governments by reducing the need for retirees to rely on public assistance programs. Author's Amendments: Proposed amendments limit employer liability, require employers to establish an open enrollment period, reduce the employer penalty to $250, and authorize the EDD to charge a fee to offset costs. Committee Amendments: Eliminate the option for a budget act appropriation to fund the initial market analysis.