BILL ANALYSIS Ó
SB 1234
Page 1
SENATE THIRD READING
SB
1234 (De León)
As Amended August 18, 2016
Majority vote
SENATE VOTE: 26-13
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|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 | |
| | | | |
| | | | |
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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, and the Directors of the
Department of Social Services and the Department of Finance
certify in writing all of the following:
a) The inclusion meets all state and federal legal
requirements.
b) The appropriate employer of record has been identified
to meet all of the employer requirements in the SCRSP.
c) A payroll deduction set forth under existing law can be
implemented at reasonable costs.
d) The inclusion does not create a financial liability for
the state or employer of record. (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
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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)
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)
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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)
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 various requirements for the Board, including a
requirement to ensure that an insurance, annuity or other
funding mechanism is in place at all times that protects the
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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
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%
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-of-salary increase in employee contributions per calendar
year.
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 individual retirement account
(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
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
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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.
iii) Online Internet Web training.
iv) Live presentations to business associations.
v) Targeted outreach to small businesses with 10 or
less employees.
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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
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,
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one or more payroll deposit 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:
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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
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).
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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
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 this bill 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
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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
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
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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
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
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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
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.
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Analysis Prepared by:
Ben Ebbink / L. & E. / (916) 319-2091 FN:
0004439