BILL ANALYSIS                                                                                                                                                                                                    Ó

                                                                  SB 1234
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          Date of Hearing:   August 8, 2012

                                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:              


          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 

          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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              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 

               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 

               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 

               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 

               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