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
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|Author: |De León |
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|Version: |4/5/16 As amended |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Pamela Schneider |
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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
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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
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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
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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
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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%.
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(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,
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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
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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
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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.