BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    SB 1234


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          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


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          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)








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          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)










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          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  








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               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.








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             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:









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             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  








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               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.










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               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  








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            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.










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          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  








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             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  








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          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 










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          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  








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            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  








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          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.











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          Analysis Prepared by:                                             
                          Ben Ebbink / L. & E. / (916) 319-2091   FN:   
          0003985