BILL ANALYSIS Ó SB 1234 Page 1 SENATE THIRD READING SB 1234 (De León) As Amended August 15, 2016 Majority vote SENATE VOTE: 26-13 ------------------------------------------------------------------ |Committee |Votes|Ayes |Noes | | | | | | | | | | | | | | | | |----------------+-----+----------------------+--------------------| |Labor |6-1 |Roger Hernández, Chu, |Patterson | | | |Linder, McCarty, | | | | |O'Donnell, Thurmond | | | | | | | |----------------+-----+----------------------+--------------------| |Appropriations |14-6 |Gonzalez, Bloom, |Bigelow, Chang, | | | |Bonilla, Bonta, |Gallagher, Jones, | | | |Calderon, Daly, |Obernolte, Wagner | | | |Eggman, Eduardo | | | | |Garcia, Holden, | | | | |Quirk, Santiago, | | | | |Weber, Wood, McCarty | | | | | | | | | | | | ------------------------------------------------------------------ SB 1234 Page 2 SUMMARY: 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. Specifically, this bill: 1)Incorporates the findings and recommendations of the California Secure Choice Retirement Savings Investment Board (Board) that were made upon conclusion of the market analysis authorized in the original version of SB 1234 (De León), Chapter 734, Statutes of 2012 and deletes obsolete requirements that are inconsistent with those findings. 2)Defines a provider of in-home supportive services as an employer if the Board determines their inclusion to be legally permissible under federal and state laws and regulations. (Government Code (GC) Section 100000 and 100046) 3)Requires the Board, subject to its authority and fiduciary duty, to design and implement the SCRSP. (GC Section 100002) 4)Provides that, for up to three years, the Board shall establish managed accounts invested in United States Treasuries, myRAs, or similar investments. The Board shall have the authority to provide for investment in myRAs, provided that contributions and investment returns shall only be used for myRA investments and to make distributions to or for the benefit of participants and accordingly shall not be used to pay any costs of administration. (GC Section 100002) 5)Provides that during this time the Board shall develop and implement an investment policy that defines the SCRSP's investment objectives and establish policies and procedures so that investment objectives can be met in a prudent manner, as specified. (GC Section 100002) SB 1234 Page 3 6)Authorizes the Board to develop investment options that address risk-sharing and smoothing of market losses and gains. Options may include, but are not limited to, the creation of a reserve fund, or the establishment of customized investment products. Implementation of such investment options shall be contingent upon subsequent approval by the Legislature. (GC Section 100002) 7)Thereafter, requires the Board to annually prepare and adopt a written statement of investment policy that includes a risk management and oversight program. The Board shall consider the statement of investment policy and any changes in the investment policy at a public hearing. (GC Section 100002) 8)Provides that moneys in the SCRSP may be invested or reinvested by the Treasurer or may be invested in whole or in part under contract with the board of a California public retirement system, with private money managers, or in the federal myRA retirement savings program. (GC Section 100004) 9)Provides that the California Secure Choice Retirement Savings Trust (Trust) is an instrumentality of the state and that any security issued, managed, or invested by the Board shall be exempt from specified provisions of law regarding the qualification of securities for sale. (GC Section 100004) 10)Eliminates 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. (GC Section 100008) SB 1234 Page 4 11)Requires the Treasurer to appoint an executive officer for the program who shall serve at the pleasure of the Board. The Board 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. (GC Section 100010) 12)Requires the Board to collaborate with and evaluate the role of insurance and financial advisors in assisting and providing guidance for eligible employers and employees. (GC Section 10010) 13)Eliminates language that authorizes the Board to secure private underwriting and reinsurance to manage risk and insure the retirement savings rate of return. (GC Section 10010) 14)Authorizes the Board to disseminate educational information designed to educate participants about the benefits of planning and saving for retirement and information to help them decide the level of participation and savings strategies that may be appropriate for them. (GC Section 100012) 15)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. (GC Sections 100012 and 100036) 16)Changes the timeframes of implementation requirements for employers to the following and allows the Board to extend the timelines if it deems necessary (GC Section 100032): a) Within 12 months after opening of enrollment, employers SB 1234 Page 5 of 100 or more employees (that do not offer a retirement savings program, as specified) must have an arrangement to allow employees to participate in the SCRSP. b) Within 24 months after opening of enrollment, employers of 50 or more employees (that do not offer a retirement savings program, as specified) must have an arrangement to allow employees to participate in the SCRSP. c) Within 36 months after opening of enrollment, employers of five or more employees (that do not offer a retirement savings program, as specified must have an arrangement to allow employees to participate in SCRSP. 17)Provides that an employer that provides an employer-sponsored retirement plan (as specified) shall be exempt from the requirements of this bill if the plan qualifies for favorable federal income tax treatment. Employers shall retain the option at all times to set up and offer a qualified employer-sponsored retirement plan instead of having an arrangement to allow employee participation in the SCRSP. (GC Section 100032) 18)Allows the Board to implement annual automatic escalation of employee contributions subject to the following limitations (GC Section 100032): a) Contributions subject to automatic escalation cannot exceed 8%. b) Automatic escalation cannot amount to more than a 1-percent-of-salary increase in employee contributions per calendar year. SB 1234 Page 6 c) An employee may opt out of automatic escalation and set his or her contribution rate at a level determined by the employee. 19)Allows the Board, unless otherwise specified by the employee, to adjust the employee contribution into the SCRSP between 2% and 5%. (GC Section 100032) 20)Provides that the SCRSP is a state-administered program, not an employer-sponsored program. If the SCRSP is subsequently found to be preempted by any federal law or regulation, employers shall not be liable as plan sponsors. (GC Section 100034) 21)Provides that an employer shall not have civil liability, and no cause of action shall arise against an employer, for acting pursuant to the regulations prescribed by the board defining the roles and responsibilities of employers that have a payroll deposit retirement savings arrangement to allow employee participation in the program. (GC Section 100034) 22)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. (GC Sections 100040, 100042. and 100043.5) 23)Provides that, prior to opening the program for enrollment, the Board shall report to the Governor and Legislature the specific date on which the program will start to enroll program participants and that the following prerequisites and requirements for the program have been met: SB 1234 Page 7 a) The United States Department of Labor has finalized a regulation setting forth a safe harbor for savings arrangements established by states for nongovernmental employees for the purposes of the federal Employee Retirement Income Security Act. b) The SCRSP is structured in a manner to meet the criteria of the United States Department of Labor regulation. c) The payroll deduction IRA arrangements offered by the SCRSP qualify for the favorable federal income tax treatment ordinarily accorded to IRA arrangements under the Internal Revenue Code. d) The Board has defined in regulation the roles and responsibilities of employers pursuant to the criteria outlined in specified United States Department of Labor regulation described and any associated guidance. e) The Board has adopted a third party administrator operational model that limits employer interaction and transactions with the employee to the extent feasible. (GC Section 100043) 24)Expresses the approval of SCRSP by the Legislature and its implementation as of January 1, 2017, and requires the Board, to consider the following parameters in designing the SCRSP (GC Section 100046): a) The Board shall include a provider of in-home supportive services in the SCRSP if it determines the inclusion to be legally permissible under federal and state laws and SB 1234 Page 8 regulations. b) The Board shall structure SCRSP so as to ensure that the state is prohibited from incurring liabilities associated with administering the program and that the state has no liability for the program or its investments. c) The Board shall determine all necessary costs related to SCRSP, as specified. d) The Board shall consult with employer representatives to create an administrative structure that facilitates employee participation while addressing employer needs, as specified. e) The Board shall include comprehensive worker education and outreach and may collaborate with public and nonprofit agencies and organizations and other entities to develop education and outreach, as specified. f) Requires the Board to include comprehensive employer education and outreach with an emphasis on employers with less than 100 employees, with the integration of the following components: i) A program Internet Web site to assist the employers of participating employees. ii) A toll-free help line for employers with live and automated assistance. SB 1234 Page 9 iii) Online Internet Web training. iv) Live presentations to business associations. v) Targeted outreach to small businesses with 10 or less employees. 1) Allows the Board to adopt emergency regulations for the purposes of implementing the SCRSP. (GC Section 100048) 2) Specifies that a payroll IRA arrangement offered pursuant to SCRSP shall have the same status and be treated consistently with any other IRA for the purpose of determining eligibility or benefit level for a program that uses a means test. (GC Section 100049) 3) States that start-up and first-year administrative costs for SCRSP may be appropriated from the General Fund and shall be repaid by the Board with interest calculated at the rate of the Pooled Money Investment Account. Future administrative costs shall be paid from the administrative fund. (GC Section 100050) 4) Makes other minor, technical, and clarifying changes. EXISTING LAW: 1)Establishes the California Secure Choice Retirement Savings Investment Board, as defined, and the California Secure Choice Retirement Savings Trust, a continuously appropriated fund, for the purpose of creating a statewide program known as SB 1234 Page 10 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 (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. SB 1234 Page 11 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 arrangement to allow employees to participate in SCRSP. 1) 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%). 2) Requires the Board, using private or non-profit funds, to SB 1234 Page 12 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. 3) 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. 4) 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). FISCAL EFFECT: According to Assembly Appropriations Committee, this bill would have an unknown fiscal impact. Total costs would be determined by the number of employers and workers participating, administrative costs, and investment performance and contribution levels. While the SCRSP is likely to eventually operate without the need for state funds, this bill states that initial startup costs for the program may be financed by a General Fund loan. The State Treasurer's Office (STO) estimates that total implementation costs over a multi-year period could reach up to $134 million. COMMENTS: The California Secure Choice Retirement Savings Investment Board writes that, "In accordance with Government Code Section 100040, the California Secure Choice Retirement Savings Investment Board (Board) finds the Secure Choice Retirement Savings Program (Secure Choice or Program) to be a feasible, sustainable, and legally permissible program that SB 1234 Page 13 could help 6.8 million workers start saving for their future. Based on the findings of the final report, stakeholder feedback, and public comment, the Board recommends that legislative language, consistent with the following principles be adopted to provide the Board sufficient flexibility, including if necessary repealing statutory language impeding such flexibility, so that it can shape the program as it develops and reacts to changes in the market, while protecting workers' contributions and limiting employer burdens. The Board recommends that Senate Bill 1234 allow the Board to: 1)Establish managed accounts that would be invested in United States (U.S.) Treasuries or similarly safe investments within the first three years of the program 2)The Board recognizes there are legal and practical hurdles to overcome before the various investment options could be implemented. Within the first three years, the Board should begin to develop investment options that address risk-sharing and smoothing of market losses and gains at inception. Options could include but not be limited to custom pooled, professionally managed funds that minimize management costs and fees, the creation of a reserve fund, or the establishment of investment products 3)The Board will conduct an annual peer review to compare California Secure Choice funds with similar funds on performance and fees 4)The Board will be required to seek to minimize participant fees SB 1234 Page 14 5)Implement program features that provide maximum possible income replacement in an IRA based environment 6)The Board will establish an initial automatic contribution rate of between 2% and 5% of salary 7)The Board may implement automatic escalation of participants' contribution rates up to 10% of salary with the option for participants to stop automatic escalation and change their contribution rates 8)The Board and its contracted administrators and consultants shall have a fiduciary duty to the participants of the Program. Investment policy decisions, including asset allocation and investment options, will be entrusted with the Board subject to fiduciary duties 9)Include quasi-public and quasi-private workers to be enrolled if found legally permissible 10)Conduct communication and education on the Program, including the inherent risks of its investment strategy or strategies, the purposes and inherent risks of investing in U.S. Treasuries or similar safe investment options for the first three years of the Program, therefore the state does not have liability for the investment performance or payment of benefits to Secure Choice participants 11)Determine the default payout method to retirees 12)Clearly define "ministerial duties" expected of employers in the implementation of the program and limit liability for all SB 1234 Page 15 employers if an employer inadvertently provides more than ministerial duties 13)Fully determine all necessary costs associated with outreach, customer service, enforcement, Board staffing and consultant costs, and all other costs necessary for the administration of the program and to ensure all investment options are appropriated considered by the Board for the Program 14)Make determinations on how to structure the Program to ensure the state is prohibited from incurring liabilities associated with administering the Program." The California Black Chamber of Commerce is in support and argues that, "Establishing this program will play a vital role in keeping small businesses competitive and helping small business owners and their employees prepare for retirement. Retirement plans are crucial to employers' ability to attract and retain employees in today's economy; yet, many small businesses are unable to provide such a program because they do not have the resources to staff a human resources department and navigate ERISA requirements. The California Secure Choice Retirement Savings Program offers an easy way for small business owners to solve this problem by offering employees access to a retirement plan with minimal administrative responsibilities on the part of small employers and most importantly no fiduciary responsibilities. A recent poll by the Small Business Majority and AARP found two-thirds of small business owners in California support a state retirement savings program that would help small businesses and their employees save for the future. Nearly three-fourths of respondents think offering such a program would give their business a competitive edge. Our members are always concerned about cost and administrative complexity, so as the SB 1234 Page 16 bill moves forward, we hope you will continue to ensure that the program is simple to administer and low cost for small businesses." The Financial Services Institute (FSI) opposes this bill, arguing that it would disrupt the already healthy and competitive retirement plan market in California. They contend that a state-run retirement plan for private employees will disrupt the pre-existing market of retirement plan providers already serving businesses of all sizes, including self-employed and non-profit organizations. The existing market of retirement plan providers consists of qualified independent financial advisors and is robust, healthy, and competitive. In addition, they argue that enrolling private employees into a state-run retirement plan will also place a heavy administrative burden on the state, and taxpayers may be forced to shoulder the costs in the event of economic difficulty. Further, employers will be saddled with the additional responsibility of ensuring their employees are enrolled in the plan and processing the necessary payroll contributions. Many small business owners do not have the time or resources for these added administrative tasks. In addition, a coalition of organizations, including the California Chamber of Commerce and the California Manufacturers & Technology Association opposes this bill unless amended. They state that they recognize the importance of encouraging people to save for retirement, and acknowledge that there is a retirement crisis facing California and our nation. However, opponents are concerned that the program that would be implemented by this bill could create costs to the state, as well as potential employer liabilities, costs and administrative burdens. They urge the author to include solutions to these critical issues in this bill and not simply them to be worked out by the Board. SB 1234 Page 17 Analysis Prepared by: Ben Ebbink / L. & E. / (916) 319-2091 FN: 0003985