BILL ANALYSIS Ó SB 1234 Page 1 Date of Hearing: July 3, 2012 ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL SECURITY Warren T. Furutani, Chair SB 1234 (De Leon) - As Amended: June 27, 2012 SENATE VOTE : 23-13 SUBJECT : Retirement savings plans. SUMMARY : Establishes the California Secure Choice Retirement Savings Program (Program) to operate as a state-administered retirement savings plan for private sector workers who do not participate in any other type of employer-sponsored retirement savings plan Specifically, this bill : 1)Establishes the California Secure Choice Retirement Savings Investment Board (Board) to consist of the State Treasurer, the Director of Finance (or his or her designee), the State Controller, an individual with retirement savings and investment expertise appointed by the Senate Committee on Rules, a small business representative appointed by the Governor, a public member appointed by the Governor, and an employee representative appointed by the Speaker of the Assembly. 2)Requires the Board to conduct an initial market analysis to determine whether the necessary conditions for implementation of the Program can be met, as specified. 3)Provides that the Program will only become operative if the Board notifies the Director of Finance that, based upon the market analysis, the Program can be self-sustaining and only if implementation costs are made available from a nonprofit or private entity, the federal government, or a budget appropriation. 4)Requires the Board to forward and offer to present the findings of the market analysis to the Chair of the Senate Committee on Labor and Industrial Relations, the Chair of the Assembly Committee on Labor and Employment, 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. SB 1234 Page 2 5)Establishes the Program to include one or more individual retirement account (IRA) arrangements for private sector employees to operate under the following parameters: a) Individual accounts under the program shall be nominal accounts and contributions shall be treated as credits to an individual's account along with interest and any additional earnings. b) The balance of the credits in an individual's account shall determine the amount to which they are entitled under the Program upon termination. c) Requires the Board, prior to July 1 of the initial Program year and annually thereafter, to adopt a Program amendment to declare the stated rate at which interest shall be credited to accounts for the following year. d) Provides that an individual's retirement savings benefit under the Program shall be an amount equal to the balance of the credits in the individual's program account on the date the retirement savings account becomes payable. e) Requires the Board to set minimum and maximum investment levels in accordance with contribution limits set forth for IRAs by the Internal Revenue Code. f) Authorizes the Board to allow participating employers to use the Program to contribute to their employees' individual retirement accounts on their employees' behalf or match their employees' contributions, provided that the contributions would be permitted under the Internal Revenue Code and would not cause the program to be treated as an employee benefit plan under the Employee Retirement Income Security Act (ERISA). 6)Provides that after the Board opens the Program for enrollment, any employer may choose to have a payroll deposit retirement savings arrangement to allow employee participation in the Program. Thereafter the following timeline would apply: a) Beginning three months after opening of enrollment, employers of 100 or more employees must have an arrangement SB 1234 Page 3 to allow employees to participate in the Program. b) Beginning six months after opening of enrollment, employers of 50 or more employees must have an arrangement to allow employees to participate in the Program. c) Beginning nine months after opening of enrollment, employers of five or more employees must have an arrangement to allow employees to participate in the Program. 7)Requires the Board, prior to opening the Program for enrollment, to disseminate an employee information packet and disclosure form to employers that, among other things, clearly articulates that the program is privately insured and not guaranteed by the State of California. 8)Provides that an employer who, without good cause, fails to allow its employees to participate in the Program within 90 days after being notified of failure to comply by the Employment Development Department, shall pay a penalty of $250 per eligible employee. If the employer if found to be in willful noncompliance 180 days after the notice shall be subject to an additional penalty of $500 per eligible employee. 9)Requires each eligible employee to be enrolled in the Program unless the employee opts out as specified, and provides for an open enrollment period. 10)Provides that, unless otherwise specified by the employee, a participating employee shall contribute 3% of their annual salary or wages into the Program (which may be adjusted by the Board to between 2% and 4%). 11)Establishes a trust (Trust) to be administered by the Board and requires moneys to be segregated into a program fund and an administrative fund. Annual expenditures from the administrative fund shall not exceed more than 1% of the total program fund. 12)Establishes guiding principles and restrictions for investment policy of Trust assets, and limits the types of investments which shall be permitted for the investment of funds. SB 1234 Page 4 13)Provides that equities shall not exceed 50% of the overall asset allocation of the fund. 14)Provides that employers shall not have any liability for an employee's decision to participate or opt out of the Program, or for the investment decisions of employees. 15)Provides that employers shall not be a fiduciary over the Program and shall bear no responsibility for the administration, investment, or investment performance of the Program. An employer shall not be liable with regard to investment returns, program design, and benefits paid to participants. 16)Requires the Board to submit an annual independently-audited financial report, as specified. 17)Provides that the state shall not have any liability for the payment of the retirement savings benefit guaranteed to Program participants. Any financial liability for the payment of benefits in excess of funds available shall be borne by insurance underwriters pursuant to a contract entered into with the Board, as specified. The state, and any of the funds of the state, shall have no obligation for payment of the guaranteed benefits arising from the program. 18)Requires the Board (prior to opening the Program for enrollment), if there is sufficient interest by vendors to participate and provide the necessary funding, to establish a Retirement Investments Clearinghouse ("Clearinghouse") on its Internet Web site. The Clearinghouse, among other features, would contain the following: a) Information about employer-sponsored retirement plans, and payroll deduction individual retirement accounts and annuities offered by private sector providers. b) Specified other information, including investment performance, fees, and other information. 19)Contains specific requirements for vendors to participate and register in the Clearinghouse, and a process for the addition and removal of vendors. SB 1234 Page 5 20)Requires the Board to include notice of the existence of the Clearinghouse on a notice to eligible employers disseminated through EDD. 21)Provides that the Board and the Program are not responsible for or liable for the adequacy of information on the Clearinghouse, as specified. 22)Makes related and conforming changes to implement the provisions of this bill. 23)Makes related legislative findings and declarations. FISCAL EFFECT : Unknown. COMMENTS : This bill would establish a supplemental retirement savings program for California's private sector workers that do not have access to retirement plans through their jobs. The author states that the program created by this bill would provide a reliable, affordable and completely portable retirement savings plan for the millions of Californians without access to a workplace retirement plan. For private sector employees, the American retirement system has traditionally relied upon a three-prong approach - Social Security benefits, private savings and employer-provided pensions. Therefore, a large component of the traditional retirement system was an employer-based retirement component, which was generally provided through a defined benefit pension where the benefit was defined by years of service and the final wages of the employee. By some estimates, as recently as 25 years ago more than 80% of large and mid-sized employers offered a defined benefit pension. Today, less than a third of such employers offer such a pension. In recent decades, employer-sponsored defined benefit pensions have been largely replaced by defined contributions pensions such as 401(k) and 457 retirement plans. In these plans, employees generally make their own decisions about how the funds are invested, taking on the entirety of the risk of their own retirement savings. While these plans are portable and have certain tax advantages, critics have pointed out that the nature of the risk shift leaves workers with the sole responsibility of making investment decisions (for which they may or may not be prepared) and leaves nest eggs vulnerable to shifts in the stock SB 1234 Page 6 market (of which recent retirees are painfully aware). According to a recent report by the University of California, Berkeley Center for Labor Research and Education, Meeting California's Retirement Security Challenge (October 2011), 62% of private sector workers in California do not participate in an employer-sponsored retirement plan, compared to 57% in the United States as a whole. Also, workers in small and medium sized firms are disadvantaged in their access to employer-sponsored retirement plans-in California, 84% of people working for employers with 25 or fewer workers do not participate in a retirement plan at work. As introduced, the Program proposed under this bill would have most closely followed the structure of a cash-balance retirement type plan. With a cash-balance retirement plan, the plan tries to blend components of a defined benefit and defined contribution plan by providing a guaranteed benefit, but tying that guaranteed benefit to a balance in the account. However, with recent amendments the author has specified that the retirement savings program designed by the Board would be individual retirement accounts or individual retirement annuities, with employee contribution limits which are the same as IRAs. The amendments also specify that voluntary employer contributions would only be allowed if they are permitted under the Internal Revenue Code and would not cause the Program to be treated as an employee benefit pension plan under ERISA. Similar to the CalSTRS cash-balance type 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. SB 1234 Page 7 This bill provides that each eligible employee shall be enrolled in the Program unless the employee elects not to participate. An eligible employee may elect to opt out of the Program by making a notation on an exemption certificate produced by EDD. The bill also provides that, at least once every two years, participating employers shall designate an open enrollment period during which eligible employees that previously opted out of the Program shall be enrolled unless the employee again elects to opt out. The bill provides that an employee who elects to opt out of the Program who subsequently wants to participate through the employer's payroll deposit retirement savings arrangement may only enroll during the employer's designated open enrollment period or if permitted by the employer at an earlier time. Finally, an eligible employee may also terminate his or her participation in the Program at any time in a manner prescribed by the Board and thereafter by making a notation on the exemption certificate produced by EDD. According to the author, the opt-out nature of this bill conforms to recent research that suggests that individuals need a "nudge" in the form of automatic enrollment in retirement savings programs. According to information submitted by the author, in one study comparing opt-in to automatic enrollment, researchers found that participation rates in opt-in plans were just 20% after three months, increasing to 65% after 36 months. With automatic enrollment, by contrast, the rates were 90% and 98%, respectively. The author states the following in support of this bill: "Across the United States, millions of workers will retire into poverty because they will not have enough in assets to meet their basic needs in their senior years. Here in California, nearly one-half of workers will face significant economic hardship in retirement, with incomes below 200% of the federal poverty threshold. The most at-risk groups are young workers age 25-44 and low-income workers, but even middle-income workers will be at substantial risk of not having enough retirement income to be self-sufficient. Since the nation's personal savings rate is extremely low SB 1234 Page 8 and retirement planning is now largely controlled by private for-profit Wall Street investment firms, the United States is staring at an economic time bomb that left unaddressed will overwhelm taxpayer-funded entitlement and other safety net programs. The lack of retirement savings affects all Californians, as seniors without sufficient retirement savings will more likely need to rely on government assistance for housing, health care and other basic necessities. California workers in the private sector need a lifelong retirement savings system that provides them with the opportunity to build their assets and achieve financial stability in retirement. The California Secure Choice Retirement Savings Program would provide a vital supplement to Social Security income by offering participants a low-risk, low-cost, and completely portable retirement savings plan that will have a guaranteed interest rate on their retirement savings. Employers that want to offer their employees a retirement savings plan also need a way to help their employees save for retirement. Private sector employers often face significant barriers in setting up their own workplace retirement plans-in addition to the costs of hiring service providers and paying service fees, plans such as 401(k)s can be complex to maintain and administer, employers must accept fiduciary responsibility, and they are subject to an array of rules and regulations. Under the California Secure Choice Retirement Savings Program, voluntary contributions from employees and employers would be pooled into a professionally-managed retirement fund that leverages economies of scale and longer investment horizons to offer every California worker the chance to enroll in a retirement savings plan. Here in California, over 6.3 million private sector workers do not have access to a retirement plan at their place of employment. If these workers contributed 3% of their earnings towards a retirement fund, the fund would have over $6 billion to invest in the first year alone." The author also contends that this bill contains the following protections for California taxpayers: SB 1234 Page 9 "Prior to the development of the California Secure Choice Retirement Savings Program, direct the Board to conduct a market analysis to determine the viability of implementation, including the assessment of likely participation rates, contribution levels, and the feasibility of investment vehicles. The market analysis would only be conducted if sufficient funds are made available through a non-profit or private entity, federal funding, or an annual Budget Act appropriation for this purpose. Following the market analysis, forward the Board's findings to the Chairs of the Senate Public Employment and Retirement Committee and the Assembly Public Employees, Retirement and Social Security Committee. The implementation of the California Secure Choice Retirement Savings Program would only move forward if the Board notifies the Director of Finance that based on the market analysis the program will be completely self-sustaining. Before studying, developing and obtaining the necessary approvals to fully implement the California Secure Choice Retirement Savings Program, the Board would have to receive sufficient funding to cover start-up costs through a non-profit, private entity, federal funding, or an annual Budget Act appropriation. Once fully implemented, the California Secure Choice Retirement Savings Trust would be self-sustaining and extremely low-risk due to the modest guaranteed benefit (likely tied to the 30-year Treasury-bond rate) and long investment horizon. In guaranteeing the rate of return for the retirement savings plans, ensure zero-liability to the state by requiring the Board to secure private underwriting and reinsurance to manage risk. There would be no state liability for the retirement savings benefit that is guaranteed to program participants. Any financial liability for the payment of benefits that exceeds the funds available in the program would be borne by the private underwriters pursuant to the contract SB 1234 Page 10 entered into with the Board on behalf of program participants." The author also argues that the bill contains the following protections for employers and employees: "Employees would receive a program information packet with a disclosure form that includes the benefits and risks of making retirement contributions, the mechanics of how to participate or opt out of the program, the process for the withdrawal of retirement savings, and how to obtain additional information about the program. The disclosure form would clearly inform employees that employers are not liable for their decisions whether to participate in or opt out of the program, or for employee investment decisions, and state that their employer is not a fiduciary of the California Secure Choice Retirement Savings Trust or program, the employer does not bear responsibility for how the program is administered, and the employer is not liable with regard to investment returns and benefits paid to program participants. In addition, the disclosure form would notify employees that their employers are not in a position to provide financial advice, and that they should contact financial advisors if they want to seek financial advice. To notify employees that the state is not liable for the retirement savings benefit, the form would also specify that the program fund is privately insured and is not guaranteed by the State of California. Employees would be required to sign and date the disclosure form acknowledging that they have read all of the disclosures and understand their content." Opponents, including the Securities Industry and Financial Markets Association, (in a letter submitted before the most recent amendments) argue that California already faces hundreds of billions of dollars in unfunded pension liability for its public sector workers. They contend that now is not the time for the state to create and assume liability for any new plan for private sector employees. Moreover, they contend that the legislation is unnecessary as California already has a robust and highly competitive retirement savings market. SB 1234 Page 11 Opponents contend that, among other things, this bill could create undue pressure on the General Fund, could create a multi-billion dollar liability for the state, unnecessarily enters the federal government's domain, and is inconsistent with the Administration's efforts to reduce government. Opponents also argue that this bill continues to raise problems for the small employers by imposing a mandated benefit rather than giving employers the flexibility to offer the mix of compensation and benefits that best meets the needs of their employees. They note that this bill seeks to eliminate an employer's potential federal liability and responsibility but do not believe that a state bill has that authority under federal law (ERISA or the Internal Revenue Code). Opponents also state that recent amendments reduce but do not eliminate the employers' operational responsibilities and compliance costs. Employers will still have to distribute information, answer questions, collect opt-out forms, and transfer contributions to the Program. Opponents object that this bill raises "serious cost issues." "Initial costs to study and develop the program and to obtain the necessary federal approvals will likely be significant. Such costs will increase dramatically if the program faces a legal challenge. While this bill sets aside one percent (1%) of the total program fund to administer the program trust on an ongoing basis, it is highly likely that administrative, compliance, insurance, premiums and other costs will exceed that amount." Opponents contend that the guaranteed rate of return on investment creates the very real possibility that the state will have to fill the gap between the promised and the realized rates of return. Insurance - which, of course, comes at a cost - may assist in this process, but the ultimate responsibility rests with the state, either as an explicit or "implied" guarantee. With respect to potential "funding shortfalls" opponents state the following: "As with any defined benefit plan, the employer/plan sponsor bears investment risk. Changes in the value of the SB 1234 Page 12 plan's investments (usually managed by the employer or an investment manager) generally do not affect the amount of benefits owed to participants. The funding rules for defined benefit plans also apply to cash balance plans. Under a cash balance plan, funding obligations are determined actuarially based on the plan's benefit commitments which include interest credits, the value of the plan's asset and expected plan demographic experience. Required contributions do not necessarily equal the sum of contributions to the hypothetical accounts. Under the Program, based on annual actuarial valuations of plan assets, if participant contributions to the plan do not equal the required minimum funding obligation for a year based on the funding rules, then additional contributions must be made." "Under the bill, the Board is directed to annually adopt a statement of investment policy and to select an investment management entity or entities. However, it does not address who is responsible for any funding shortfalls. Generally, under the Ýfederal law] provisions applicable to multiple employer plans, each employer is treated as maintaining a separate plan for purposes of minimum funding standards. This would suggest that each participating employer will be left liable for any funding deficiencies. What if a participating employer has gone out of business? What if the employer no longer employs any participating employees?" "Sponsors of the bill counter that an insurance policy will address this issue. The state assumes the existence of an insurance policy that would cover market risk regarding the assets, longevity risk (because defined benefit plans must offer an annuity form of payment), benefit guarantees set by the Board, and a risk regarding administration. If this type of coverage is available, we expect it will be very expensive. This expense would also likely be paid from the administrative fund, which has the 1% limit on expenses cited above. Note however, that even if an insurer did cover these costs, ERISA would not shift liability to the insurer; the participating employer would retain liability for payment of any underfunding. This is significant because in the event the insurance contract is discontinued or for some reason the specifics of the contract do not require payment in any case, the participating employer is SB 1234 Page 13 the entity who would be left responsible for these amounts under the federal tax code." Opponents conclude that, "In the case of a market downturn, such as occurred in 2008, a devastating funding shortfall would be likely. The liability will be left to a state which is already struggling financially, or to California employers who were forced to participate. We do not believe that an insurance contract is enough to address these significant concerns." This bill is similar to AB 125 (De Leon) of 2009, and AB 2940 (DeLeon) of 2008, both of which would have created a California Employee Savings Program to be administered by CalPERS. Both bills were held in the Senate Committee on Appropriations. REGISTERED SUPPORT / OPPOSITION : Support AARP-California American Federation of State, County and Municipal Employees, AFL-CIO Association of California School Administrators California Association of Highway Patrolmen California Association of Professional Scientists California Association of Psychiatric Technicians California Communities United Institute California Faculty Association California Federation of Teachers California Labor Federation, AFL-CIO California Professional Firefighters California Retired County Employees Association California School Employees Association California Teachers Association California-Nevada Conference of Operating Engineers Congress of California Seniors Earned Assets Resource Network East Hollywood Chamber of Commerce Faculty Association of California Community Colleges Greenlining Institute JERICHO Latinos for a Secure Retirement Little Armenia Neighborhood Association National Conference on Public Employee Retirement Systems National Hispanic Council on Aging Numerous individuals SB 1234 Page 14 Peace Officers Research Association of California Professional Engineers in California Government SEIU United Long Term Care Workers Service Employees International Union Local 721 Service Employees International Union Local 1000 Service Employees International Union Local 99 State Association of County Retirement Systems TELACU United Food and Commercial Workers Local 1428 United Teachers Los Angeles Western Prelacy Armenian Schools Workers United-SEIU Western States Regional Joint Board Opposition Allstate Insurance Company American Council of Engineering Companies of California American Council of Life Insurers Association of California Life and Health Insurance Companies California Association of Health Underwriters California Chamber of Commerce California Farm Bureau Federation California Framing Contractor's Association California Grocers Association California Independent Grocers Association California Manufacturers & Technology Association California Retailers Association California Small Business Association Financial Planning Association Financial Services Institute Fullerton Chamber of Commerce Garden Grove Chamber of Commerce Hispanic Engineers Business Corporation Howard Jarvis Taxpayers Association ING 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 Orange Chamber of Commerce Pacific Life Insurance Company Personal Insurance Federation of California Plumbing-Heating-Cooling Contractors Association of California Principal Financial Group SB 1234 Page 15 San Gabriel Valley Legislative Coalition of Chambers Securities Industry and Financial Markets Association Small Business California State Farm The Financial Services Roundtable Western Electrical Contractors Association Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916) 319-3957