BILL ANALYSIS Ó SENATE COMMITTEE ON PUBLIC EMPLOYMENT AND RETIREMENT Dr. Richard Pan, Chair 2015 - 2016 Regular Bill No: SB 1234 Hearing Date: 4/11/16 ----------------------------------------------------------------- |Author: |De León | |-----------+-----------------------------------------------------| |Version: |4/5/16 As amended | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |Yes | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant:|Pamela Schneider | | | | ----------------------------------------------------------------- Subject: California Secure Choice Retirement Savings Program SOURCE: Author DIGEST: This bill provides legislative approval for the California Secure Choice Retirement Savings Program (SCRSP) and sets forth recommendations and requirements for the design and implementation of that program. ANALYSIS: Existing law: 1)Establishes the California Secure Choice Retirement Savings Investment Board (Board), as defined, and the California Secure Choice Retirement Savings Trust (Trust), a continuously appropriated fund, for the purpose of creating a statewide program known as SCRSP. 2)Defines who shall be appointed to the Board, the Board's fiduciary role, and entrusts the Board with investment policy oversight and design. 3)States that the primary objective of the investment policy is to preserve the safety of principle and provide a stable and low-risk rate of return, as specified. 4)Requires that the program include, as determined by the Board, one or more payroll deposit individual retirement account SB 1234 (De León) Page 2 of ? (IRA) options; requires the Board to annually declare a stated rate of return at which interest shall be allocated to program accounts for the following year; and states that an individual's retirement savings benefit under the program shall be an amount equal to the balance in the individual's account on the date the retirement savings benefit becomes payable. 5)Defines the Board's duties and powers, in the capacity of trustee to administer and invest the Trust, and 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. 6)Requires the Board to ensure that an insurance, annuity or other funding mechanism is in place at all times that protects the value of individuals' accounts. Such funding mechanism shall protect, indemnify and hold the state harmless at all times against any and all liabilities in connection with funding retirement benefits under the SCRSP. 7)Provides that the state shall not have any liability for the payment of the retirement savings benefit earned by SCRSP participants. The state, and any of the funds of the state, shall have no obligation for payment of the benefits arising from the SCRSP. 8)Clarifies that employers shall not be fiduciaries of the SCRSP nor be liable for employees' investment decisions. 9)Provides that after the Board opens the SCRSP for enrollment, any employer may choose to have a payroll deposit retirement savings arrangement to allow employee participation in the SCRSP. Thereafter the following timeline would apply: a) Beginning three months after opening of enrollment, employers of 100 or more employees must have an arrangement to allow employees to participate in the SCRSP. 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 SCRSP. c) Beginning nine months after opening of enrollment, employers of five or more employees must have an SB 1234 (De León) Page 3 of ? arrangement to allow employees to participate in SCRSP. 10) Provides that, unless otherwise specified by the employee, a participating employee shall contribute 3% of their annual salary or wages into the SCRSP (which may be adjusted by the Board to between 2% and 4%). 11) Requires the Board, using private or non-profit funds, to conduct an initial market analysis to determine whether the necessary conditions for implementation of the SCRSP can be met, as specified, and to report to the Legislature on its findings, as specified. 12) Provides that the SCRSP will only become operative if the Board determines, based upon the market analysis, that the SCRSP 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. 13) Provides that the Board shall not implement the SCRSP if the IRA arrangements offered fail to qualify for the favorable federal income tax treatment ordinarily accorded IRAs under the IRC, or if it is determined that the SCRSP is an employee benefit plan under the federal Employment Retirement Income Security Act (i.e., ERISA). This bill: 1)Incorporates the findings and recommendations of the Board upon concluding the market analysis authorized in the original version of SB 1234 (De Leon, Chapter 734, Statutes of 2012) and deletes obsolete requirements that are inconsistent with those findings. 2)Requires that contract administrators and consultants also discharge their duties as fiduciaries with respect to the program. (Section 100002) 3)States that investment policy decisions, including asset allocation and investment options, shall be entrusted to the Board subject to its fiduciary duties and eliminates language limiting the Board's options as to which asset categories it may consider. (Section 100002) 4)Eliminates language requiring the Board to annually adopt a SB 1234 (De León) Page 4 of ? stated rate of return for the following program year and stating that an individual's retirement savings benefit under the program shall be equal to the balance in the individual's account at retirement. (Section 100008) 5)Gives the Treasurer the authority to appoint an executive officer for the program who shall serve at the pleasure of the Board, which may authorize the director to enter into contracts or conduct business on behalf of the Board. The Treasurer shall determine the duties of the executive director and other necessary staff and set his or her compensation. (Section 100010) 6)Eliminates the requirement for the Board to ensure that an insurance, annuity or other funding mechanism is in place at all times that protects the value of individuals' accounts and holds the state harmless. (Sections 100012, 100036) 7)Changes the timeframes around implementation requirements for employers to the following and allows the Board to extend the timelines if it deems necessary (Section 100032): a) Beginning 12 months after opening of enrollment, employers of 100 or more employees must have an arrangement to allow employees to participate in the SCRSP. b) Beginning 24 months after opening of enrollment, employers of 50 or more employees must have an arrangement to allow employees to participate in the SCRSP. c) Beginning 36 months after opening of enrollment, employers of five or more employees must have an arrangement to allow employees to participate in SCRSP. 8)Allows the Board to implement annual automatic escalation of employee contributions subject to the following limitations (Section 100032): a) Contributions subject to automatic escalation cannot exceed 8 percent. b) Automatic escalation cannot amount to more than 1 % annually. c) An employee may opt out of automatic escalation and set SB 1234 (De León) Page 5 of ? his or her contribution rate at a level determined by the employee. 9)Allows the Board, unless otherwise specified by the employee, to set the initial employee contribution into the SCRSP between 2% and 5%. (Section 100032) 10)Eliminates requirements for the Board to conduct an initial market analysis and to present findings to the Legislature before the SCRSP may be implemented, and related statutes. (Sections 100040, 100042. 100043.5) 11)Expresses the approval of SCRSP by the Legislature and its implementation as of January 1, 2017, and requires the Board, subject to its fiduciary responsibility, to design and implement SCRSP while utilizing and considering the following parameters (Section 100046): a) For up to three years, the Board may establish managed accounts invested in U.S. Treasuries or similarly safe investments, during which time the Board may develop investment options that address risk-sharing and smoothing market gains and losses, as specified. b) The Board shall minimize participant fees. c) The Board shall strive to implement features that provide maximum income replacement balanced with appropriate risk in an IRA based environment. d) The Board shall determine the default payout method for retirees. e) The Board, if legally permissible under federal and state laws, shall include quasi-public and quasi-private employees in SCRSP. f) The Board shall structure SCRSP so as to ensure that the state is free from all liability for the program. g) The Board shall determine all necessary costs related to SCRSP, as specified. h) The Board shall partner with employer representatives to SB 1234 (De León) Page 6 of ? create an administrative structure that addresses employer needs, as specified. i) Gives the Board flexibility to design SCRSP in order to ensure timely implementation and states that the parameters are not conclusive but may be augmented as needed to fully implement the program and comply with the Board's fiduciary duties. 1) Allows the Board to adopt emergency regulations for the purposes of designing and implementing SCRSP for up to 180 days, after which, the regulations would be subject to the standard rule making process. (Section 100048) 2) States that start-up costs for SCRSP may be appropriated from the General Fund as a loan that shall be repaid by SCRSP with interest calculated at the rate of the Pooled Money Investment Account and specifies that administrative costs shall be paid in future from the administrative fund. (Section 100508) 3) Makes other minor, technical, and clarifying changes. (Sections 100002, 100008, 10001) Background In 2012, SB 1234 was passed to create SCRSP and to create and empower its Board to perform a feasibility study to determine whether the legal and practical conditions for implementation of SCRSP could be met. The Board approved an approach to the study analysis that included four distinct, but well-coordinated focus areas: program design, market analysis, financial feasibility, and legal feasibility. The key findings in the report are the following: (1) About 6.8 million workers are potentially eligible for the California Secure Choice Retirement Savings Program. (2) Likely participation rates (70-90%) are sufficiently high to enable the Program to achieve broad coverage well above the minimum threshold for financial sustainability. (3) Eligible participants in California are equally comfortable with a 3% or 5% contribution rate. The vast majority of likely participants are also comfortable with auto-escalation in 1% increments up to 10%. SB 1234 (De León) Page 7 of ? (4) To start, the program should offer a default investment option consisting of a diversified portfolio with long-term growth potential and the choice to opt into a low-risk investment. (5) Given its inherent portability, the Program should have a lower incidence of rollovers and cash-outs than employer-sponsored 401(k) plans, which often force workers with low balances to close their accounts. At the same time, pre-retirement withdrawals are likely to be higher for the Program given eligible workers' income profile. (6) The Program launch should include a concerted public education campaign focused on workers and small businesses. The report in its entirety can be found on the SCRSP webpage on the Treasurer's website. http://www.treasurer.ca.gov/scib/report.pdf Related/Prior Legislation SB 1234 (De León, Chapter 734, Statutes of 2012) created the initial statutory framework for SCRSP and required the Board to perform a market analysis and feasibility study to determine if SCRSP could be implemented and to publish its findings and bring a recommendation to the Legislature for approval. FISCAL EFFECT: Appropriation: Yes Fiscal Com.: Yes Local: No SUPPORT: John Chiang, California State Treasurer American Association of Retired Persons American Retirement Association Asian Business Association California Association of Nonprofits California Church IMPACT California Conference Board of the Amalgamated Transit Union California Conference of Machinists California Labor Federation California Secure Choice Retirement Savings Investment Board California Teamsters Public Affairs Council Earned Assets Resource Network Engineer & Scientist of California, Local 20, IFPTE Local 20, SB 1234 (De León) Page 8 of ? AFL-CIO International Longshore and Warehouse Union National Council of La Raza Professional & Technical Engineers, IFPTE Local 21, AFL-CIO Riverside County Black Chamber of Commerce Service Employees International Union, Local 1000 Small Business Majority State Building and Construction Trades Council of California UNITE-HERE, AFL-CIO United Ways of California Utilities Workers Union of America, Local 132, AFL-CIO Vasquez & Company, LLP OPPOSITION: Financial Services Institute OPPOSE UNLESS AMENEDED: California Asian Pacific Chamber of Commerce California Building Industry Association California Business Roundtable California Chamber of Commerce California Farm Bureau Federation California Framing Contractors Association California Grocers Association California Lodging Industry Association California Manufacturers & Technology Association California Professional Association of Specialty Contractors California Travel Association Camarillo Chamber of Commerce Culver City Chamber of Commerce National Federation of Independent Business North Orange County Chamber Oxnard Chamber of Commerce Palm Desert Area Chamber of Commerce Redondo Beach Chamber of Commerce Residential Contractors Association Santa Maria Chamber of Commerce & Visitor and Convention Bureau Securities Industry and Financial Markets Association South Bay Association of Chambers of Commerce The Greater Conejo Valley Chamber of Commerce Western Carwash Association Western Electrical Contractors Association Western Growers Association SB 1234 (De León) Page 9 of ? NEUTRAL: American Council of Life Insurers Association of California Life and Health Insurance Companies National Association of Insurance and Financial Advisors ARGUMENTS IN SUPPORT: From the SCRSP Board: In accordance with Government Code Section 100040, the California Secure Choice Retirement Savings Investment Board finds the Secure Choice Retirement Savings Program to be a feasible, sustainable, and legally permissible program that could help 6.8 million workers start saving for their future. We encourage the Legislature and the Governor to move forward with Secure Choice. While the preliminary work for this endeavor has come to a close, there is much more to do. We must continue to collaborate with members of the Legislature, workers, businesses and other stakeholders to improve the Program as it develops. California continues to be a thought leader on this front and believes that every worker deserves the option to retire with dignity. From the author: Social Security is the foundation of retirement income for the vast majority of retirees in California, but these payments alone-today averaging $1,328 per month-are simply not enough to sustain workers in retirement. Although Social Security has reduced the poverty rate among retirees in general, women and minorities are disproportionately represented among retirees living in poverty and among low-income retirees. In California, approximately 2/3 of the retirees living in poverty are women. On February 24, 2016, AARP and Small Business Majority released an opinion poll that revealed that two-thirds of small business owners in California support the creation of a state retirement savings program that would help small SB 1234 (De León) Page 10 of ? businesses and their employees save for retirement. In addition, nearly three-fourths (73%) of the respondents expressed the belief that offering such a program would give their business a competitive edge. Overall, the lack of retirement savings impacts all Californians, as seniors without sufficient retirement income will need to rely on government assistance for housing, health care and other basic necessities. The California Secure Choice Program will provide participants with a professionally-managed, lifelong retirement savings system that offers them the opportunity to build their assets and achieve financial stability when they can no longer work.