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
          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 

          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 


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          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 

          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.


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          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 

          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 


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             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 

             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 


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               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; 


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           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 

          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 

          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?


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          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.