BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SB 1234 (De León) - Retirement savings plans
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|Version: April 5, 2016 |Policy Vote: P.E. & R. 3 - 2 |
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|Urgency: No |Mandate: No |
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|Hearing Date: April 25, 2016 |Consultant: Robert Ingenito |
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This bill meets the criteria for referral to the Suspense File.
Bill Summary: SB 1234 would (1) provide legislative approval for
the California Secure Choice Retirement Savings Program
(Program), and (2) set forth recommendations and requirements
for the design and implementation of the Program.
Fiscal Impact: The fiscal impact of this bill is subject to
considerably uncertainty, and would depend on a myriad of
assumptions. The State Treasurer's Office (STO) estimates that
total administrative costs over a multi-year period could reach
up to $134 million. After the first few years of operation,
however, STO estimates that the program could be operated solely
using Program assets (See Staff Comments).
Background: 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
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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.
In 2012, SB 1234 was passed to (1) create the Program, and (2)
empower its Board (the California Secure Choice Retirement
Savings Investment Board) to perform a feasibility study to
determine whether the legal and practical conditions for
implementation of the Program could be met. The Board approved
an approach to the study analysis that included four distinct
areas of focus: program design, market analysis, financial
feasibility, and legal feasibility. The report's key findings
included the following:
About 6.8 million workers are potentially eligible for
the Program.
Likely participation rates (70 to 90 percent) are
sufficiently high to enable the Program to achieve broad
coverage well above the minimum threshold for financial
sustainability.
Eligible participants in California are equally
comfortable with a 3 percent to 5 percent contribution
rate. The vast majority of likely participants are also
comfortable with auto-escalation in one percentage point
increments, up to 10 percent.
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.
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
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time, pre-retirement withdrawals are likely to be higher
for the Program given eligible workers' income profile.
Proposed Law: This bill would, among other things, do the
following:
Incorporate 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 delete obsolete requirements that are
inconsistent with those findings.
Require that contract administrators and consultants
also discharge their duties as fiduciaries with respect to
the program.
State 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.
Eliminate language requiring the Board to annually adopt
a 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.
Give 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.
Eliminate 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.
Beginning 12 months after opening of enrollment,
employers of 100 or more employees must have an arrangement
to allow employees to participate in the Program. Beginning
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24 months after opening of enrollment, employers of 50 or
more employees must have an arrangement to allow employees
to participate in the Program. Beginning 36 months after
opening of enrollment, employers of five or more employees
must have an arrangement to allow employees to participate
in Program.
Allow the Board to implement annual automatic escalation
of employee contributions subject to specified limitations.
Allow the Board, unless otherwise specified by the
employee, to set the initial employee contribution into the
Program between 2 percent and 5 percent.
Eliminate requirements for the Board to conduct an
initial market analysis and to present findings to the
Legislature before the Program may be implemented.
Express the approval of the Program by the Legislature
and its implementation as of January 1, 2017, and requires
the Board, subject to its fiduciary responsibility, to
design and implement the Program while utilizing and
considering the following parameters:
o 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.
o The Board shall minimize participant fees.
o The Board shall strive to implement features
that provide maximum income replacement balanced with
appropriate risk in an IRA based environment.
o The Board shall determine the default payout
method for retirees.
o The Board, if legally permissible under
federal and state laws, shall include quasi-public and
quasi-private employees in the Program.
o The Board shall structure the Program so as to
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ensure that the state is free from all liability for
the program.
o The Board shall determine all necessary costs
related to the Program, as specified.
o The Board shall partner with employer
representatives to create an administrative structure
that addresses employer needs, as specified.
o Gives the Board flexibility to design the
Program 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.
Allow the Board to adopt emergency regulations for the
purposes of designing and implementing the Program for up
to 180 days, after which, the regulations would be subject
to the standard rule making process.
State that start-up costs for the Program may be
appropriated from the General Fund as a loan that shall be
repaid by the Program with interest calculated at the rate
of the Pooled Money Investment Account and specify that
administrative costs shall be paid in future from the
administrative fund.
Related Legislation: SB 1234 (De León, Chapter 734, Statutes of
2012) created the initial statutory framework for the Program
and required the Board to perform a market analysis and
feasibility study to determine if the Program could be
implemented and to publish its findings and bring a
recommendation to the Legislature for approval.
Staff Comments: An accurate depiction of exact costs to operate
the Program cannot be ascertained in advance. Costs would be
determined by several factors that are currently unknown,
including (1) the number of employers participating in the
Program, (2) the number of employees participating in the
Program, (3) costs related to recordkeeping, (4) the investment
performance of the Program, and, (5) the level of contributions
made by participants to the Program. In addition, the Employment
Development Department would incur costs associated with program
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operation, and the Board would require staff and office space.
Modeling done by the market analysis firm that performed the
feasibility study indicates that up to $134 million would be
required to finance implementation of the Program and assure
that participants would not be subject to administrative fees
exceeding 100 basis points. As noted previously, though the
Board has determined that the Program could ultimately be
operated solely from Program assets, a loan would be required to
develop and implement the program during the first few years of
operation. Options for startup financing include a line of
credit or a General Fund loan.
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