BILL ANALYSIS Ó
SB 1234
Page 1
Date of Hearing: August 8, 2012
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
SB 1234 (De León) - As Amended: June 27, 2012
Policy Committee: PERSS Vote:4-2
Labor and Employment 5-2
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill establishes the California Secure Choice Retirement
Savings 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 to consist of the State Treasurer, the
Director of Finance, the State Controller and four additional
members with specified backgrounds. The Senate Rules Committee
and the Speaker of the Assembly have one appointment each and
the governor has two appointments.
2)Requires the Board to conduct an initial market analysis to
determine whether the necessary conditions for implementation
of the retirement program can be met, as specified.
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 private financial institutions, other financial
and service providers, consultants, actuaries, counsel,
auditors, third-party administrators and other professionals
as necessary.
4)Provides that the program only becomes operative if the Board
notifies the Director of Finance that based upon the market
analysis, the program can be self-sustaining and
implementation costs are available from a nonprofit or private
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entity or the federal government.
5)Provides that an employer who fails to allow its employees to
participate in the Program after being notified of failure to
comply by the Employment Development Department (EDD) shall
pay a penalty, as specified.
6)Requires each eligible employee to be enrolled in the Program
unless the employee opts out as specified, and provides for an
open enrollment period.
7)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%).
8)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.
9)Provides annual expenditures shall not exceed more than 1% of
the total program fund.
10)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.
11)Authorizes the Board to establish a Retirement Investments
Clearinghouse on its Internet Web site.
FISCAL EFFECT
The costs associated with this bill can be divided into several
phases, each with a different source and level of funding.
1) The initial study and approval phase . This initial phase
takes effect only when sufficient funds are appropriated in
the annual state budget or are made available from a
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nonprofit or private entity to initiate a feasibility study
and to obtain the federal approvals necessary to implement
the program. Costs for this phase would be in excess of $1
million. The amount would depend, in part, on findings from
initial marketing surveys and other studies on the
financial feasibility of the program.
AB 2940 (de León) of 2008, and AB 125 (de León) of 2009
required CalPERS to administer a similar program. CalPERS
estimated initial study costs at approximately $1.69
million over an implementation period of 24 months. 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.
2) Implementation phase . If the program is determined to
be feasible and is implemented, the state will incur
additional start up costs, potentially exceeding $10
million, to market the program to workers and to implement
recordkeeping, collections, and processing functions.
These costs would eventually be recouped from fees deducted
from participants' contributions, but they would initially
need to be covered from an appropriation or a loan from the
General Fund or other sources.
3) Ongoing phase . Costs during this phase would be covered
by fees deducted from participants' contributions. The
specific costs unknown, but are estimates to be
multi-million annual expenses to be paid from earnings on
the trust.
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COMMENTS
1) Purpose . The author states across the country, millions
of workers will retire into poverty because they will not
have enough in assets to meet their basic needs in their
senior years. In particular, the author notes, in
California, nearly one-half of workers will face
significant economic hardship in retirement, with incomes
below 200% of the federal poverty threshold. The author
argues 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. The author argues 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
author contends SB 1234 creates the California Secure
Choice Retirement Savings Program which would provide a
vital supplement to Social Security income by offering
participants a low-risk, low-cost, and completely portable
retirement savings plan with a guaranteed interest rate on
their retirement savings.
The author argues that California taxpayers are protected
because prior to the development of the California Secure
Choice Retirement Savings Program, the bill directs the
Board to conduct a market analysis to determine the
viability of implementation. Market analysis would only be
conducted if sufficient funds are made available through a
non-profit or private entity or federal funding.
Implementation of the program would only move forward if
the market analysis finds the program will be completely
self-sustaining. The author concludes 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 entered into with the
Board on behalf of program participants.
The author also argues the bill contains protections for
employers and employees.
SB 1234 requires employees to receive a program information
packet with a disclosure form that includes the benefits
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and risks of making retirement contributions and additional
program information. The bill states 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 states the 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.
The author concludes the state is protected because the
disclosure form will also notify employees that the state
is not liable for the retirement savings benefit. The form
would specify 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.
2) Opposition. Opponents, including the Securities
Industry and Financial Markets Association, argue that
California already faces hundreds of billions of dollars in
unfunded pension liability for its public sector workers.
They argue 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 the legislation is
unnecessary as California already has a robust and highly
competitive retirement savings market.
Opponents argue 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 contend this bill continues to raise
problems for 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 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, the Employee Retirement
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Income Security Act of 1974 (ERISA) or the Internal Revenue
Code.
Opponents also state employers have 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 cost issues as
initial costs to study and develop the program and to
obtain the necessary federal approvals will likely be
significant. They argue such costs will increase
dramatically if the program faces a legal challenge and
while this bill sets aside 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 the guaranteed rate of return on
investment creates the possibility the state will have to
fill the gap between the promised and the realized rates of
return. They concede insurance may assist in this process,
but the ultimate responsibility rests with the state,
either as an explicit or implied guarantee. Opponents doubt
if this type of coverage is available, but expect it to be
very expensive if available.
With respect to potential funding shortfalls, opponents
argue that, as with any defined benefit plan, the
employer/plan sponsor bears investment risk and the funding
rules for defined benefit plans also apply to cash balance
plans. They note 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. Opponents observe that generally,
under ERISA provisions applicable to multiple employer
plans, each employer is treated as maintaining a separate
plan for purposes of minimum funding standards, suggesting
each participating employer will be left liable for any
funding deficiencies.
Opponents conclude in the case of a market downturn, such
as occurred in 2008, a devastating funding shortfall would
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be likely and the liability will be left to a state which
is already struggling financially, or to California
employers who were forced to participate. Opponents do not
believe that an insurance contract is enough to address
these significant concerns.
3) Background . For private sector employees, retirement
has traditionally relied upon a three-prong approach -
Social Security benefits, private savings and
employer-provided pensions. The employer-provided pension
was a large component of the traditional retirement system,
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 point out 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 retirement savings vulnerable to
shifts in the stock market.
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. 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.
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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.
1) Retirement products background. In terms of retirement
products currently in use, the program proposed under this
bill would most closely follow 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.
In a traditional defined benefit plan, the employee is
guaranteed a benefit based on a formula, generally
reflecting the employee's age, final compensation and years
of service at retirement. However, in a cash balance plan,
payment of a benefit is also guaranteed, but rather than
basing the benefit on a formula, the payment of
contributions previously made is guaranteed, as well as the
earnings that were credited to the account.
In a defined contribution plan, often a 401(k), the
employee has an individual account in which contributions
and any investment earnings are credited to the employee's
account. At the time of retirement, disability, death or
termination of employment, the employee receives a benefit
equal to the balance in that account. However, in a cash
balance plan, the employee also has a nominal account in
which contributions and any investment earnings are
credited to the employee's account. At the time of
retirement, disability, death or termination of program
membership, the employee also receives a benefit equal to
the balance in that account as they would in a defined
contribution.
With a typical cash-balance plan, a participant's account
is credited each year with a "pay credit" (such as five %
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
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the employer. The Board would then have the responsibility
of setting an interest rate/credit on an annual basis.
2) Secure choice pension . This bill appears to be
patterned, at least in part, after the Secure Choice
Pension program developed by the National Conference on
Public Employee Retirement Systems (NCPERS) as a program to
enhance retirement security and income for private sector
workers. The Secure Choice Pension is designed as a
public-private enterprise for those who currently do not
have a pension (particularly for small and mid-sized
businesses). It is not a replacement for existing pension
plans in the public or private sectors, nor is it intended
to replace 401(k)s. Rather the Secure Choice Pension is
modeled after a "cash balance" type defined benefit plan.
Investments choices are meant to be conservative to manage
downside funding risk.
3) Federal law. 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.
4) Automatic enrollment . This bill provides that each
eligible employee shall be enrolled in the California
Secure Choice Retirement Savings Program unless the
employee elects not to participate. An eligible employee
may elect to opt out. The bill also provides that, at
least once every two years, there will be an open
enrollment period and eligible employees that previously
opted out of the Program will be enrolled unless the
employee again elects to opt out.
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In a recent report by the United States Government
Accountability Office (GAO) examining enrollment in 401(k)
plans, the GAO stated that automatic enrollment appears to
significantly increase participation in 401(k) plans
according to existing studies, but may not be suitable for
all plan sponsors. Some studies found that participation
rates can reach as high as 95 % under automatic enrollment.
In most cases, these plans automatically enroll only new
employees, rather than all employees. The GAO also noted
that automatic enrollment may not be suitable for all plan
sponsors, such as those with a high-turnover workforce.
9) Prior legislation . This bill is similar to AB 125 (de
León) of 2009, and AB 2940 (de León) 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.
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081