BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 1234| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- UNFINISHED BUSINESS Bill No: SB 1234 Author: De León (D), et al. Amended: 8/18/16 in Assembly Vote: 21 SENATE PUBLIC EMP. & RET. COMMITTEE: 3-2, 4/11/16 AYES: Pan, Beall, Hall NOES: Morrell, Moorlach SENATE APPROPRIATIONS COMMITTEE: 5-2, 5/27/16 AYES: Lara, Beall, Hill, McGuire, Mendoza NOES: Bates, Nielsen SENATE FLOOR: 26-13, 6/2/16 AYES: Allen, Beall, Block, De León, Galgiani, Glazer, Hall, Hancock, Hernandez, Hertzberg, Hill, Hueso, Jackson, Lara, Leno, Leyva, Liu, McGuire, Mendoza, Mitchell, Monning, Pan, Pavley, Roth, Wieckowski, Wolk NOES: Anderson, Bates, Berryhill, Cannella, Fuller, Gaines, Huff, Moorlach, Morrell, Nguyen, Nielsen, Stone, Vidak NO VOTE RECORDED: Runner ASSEMBLY FLOOR: 52-26, 8/25/16 - See last page for vote SUBJECT: Retirement savings plans 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. SB 1234 Page 2 Assembly Amendments further clarify the California Secure Choice Retirement Savings Investment Board's (Board) role in developing and administering SCRSP, including a requirement to set up managed accounts invested in treasuries or similar securities for the first three years following implementation; add provisions clearly indemnifying employers from any liability resulting from employees' participation in SCRSP and clarifying that employers always retain the right to provide their own employer-sponsored retirement plans in lieu of SCRSP; clarify requirements that must be met in order to include in-home supportive services workers in SCRSP; and make technical changes to ensure consistency among the bills various provisions and requirements. ANALYSIS: Existing law: 1)Establishes the 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 (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. SB 1234 Page 3 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. Requires the Board to structure the program so as to ensure the state is prohibited from incurring liabilities associated with the program. 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. 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 SB 1234 Page 4 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)Defines specific terms related to the SCRSP, including "eligible employer" and "eligible employee" and "myRA." (Section 100000) 3)Requires that contract administrators and consultants discharge their duties as fiduciaries with respect to the program. (Section 100002) 4)States that the Board shall design and implement SCRSP subject to its authority and fiduciary duty; requires, for up to three years following initial implementation, that the Board shall establish managed accounts invested in US treasuries, myRAs, or similar investments; requires that myRA contributions and SB 1234 Page 5 returns be administered in accordance with federal requirements; and eliminates language limiting the Board's options as to which asset categories it may consider. (Section 100002) 5)Requires the Board, during the three year period following implementation, to develop and implement an investment policy and establish policies and procedures designed to meet investment objectives in a prudent manner, minimizing participant fees and maximizing returns, as specified; allows the Board to include a range of risk and return opportunities; allows the Board to develop investment options that address risk-sharing and smoothing of market losses and gains and include the creation of a reserve fund, pursuant to legislative approval; and requires the Board, after the initial three year period, to annually prepare and adopt a written statement of investment policy, as specified. (Section 100002) 6)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; eliminates language requiring costs of the program administrator to be paid out of funds held in the trust and prohibiting the attribution of those costs to the administrative costs of the Board. (Section 100008) 7)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) 8)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. (Section 10010) 9)Eliminates the requirement for the Board to ensure that an SB 1234 Page 6 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 10008, 100012, 100036) 10)Specifies the Board's duties to provide information and appropriate forms to employers and employees and clarifies that the program is not sponsored by the employer and that the employer is not responsible or liable of the plan. (Sections 100014, 100034 ) 11)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. 12)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 his or her contribution rate at a level determined by the employee. 13) Allows the Board, unless otherwise specified by the employee, to set the initial employee contribution into the SCRSP between 2% and 5% and clearly states that employers always retain the right to provide their own employer-sponsored retirement plans in lieu of SCRSP. (Section 100032) SB 1234 Page 7 14)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) 15)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 and Welfare and Institutions Code, 12302.2): a) The Board, if legally permissible under federal and state laws and subject to approval by the directors of the state departments of Social Services and Finance, shall include in-home supportive services providers in SCRSP, as specified. b) The Board shall structure SCRSP so as to ensure that the state is free from all liability for the program. 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 addresses 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. 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) Specifies that a payroll IRA arrangement offered pursuant to SCRSP shall have the same status and be treated consistently with any other IRA qualified under the United State Code for the purpose of determining eligibility or benefit level for a program that uses a means test. (Section 100049) 3) States that start-up costs for SCRSP may be appropriated SB 1234 Page 8 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 100050) 4) Makes other minor, technical, and clarifying changes. Background In 2012, SB 1234 (De León, Chapter 734, Statutes of 2012) 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 SCRSP. 2)Likely participation rates (70-90%) are sufficiently high to enable the SCRSP 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%. 4)To start, the SCRSP 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 SCRSP 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 SCRSP launch should include a concerted public education campaign focused on workers and small businesses. SB 1234 Page 9 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.:YesLocal: No According to Assembly Appropriations Committee, 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 Secure Choice Program is likely to eventually operate without the need for state funds, SB 1234 states that initial startup costs for the Secure Choice 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. SUPPORT: (Verified8/19/16) John Chiang, California State Treasurer American Association of Retired Persons American Retirement Association Asian Business Association California Advocacy Network for Aging Latinos California Asset Building Coalition California Association of Nonprofits California Capital Financial Development Corporation California Council of Churches IMPACT California Commission on Aging California Conference Board of the Amalgamated Transit Union SB 1234 Page 10 California Conference of Machinists California Labor Federation California Secure Choice Retirement Savings Investment Board California Teamsters Public Affairs Council Congress of California Seniors Corporation for Enterprise Development Courage Campaign Earned Assets Resource Network Engineer & Scientists of California, Local 20, IFPTE Local 20, AFL-CIO Fresno Metro Black Chamber of Commerce Insight Center for Community Economic Development International Longshore and Warehouse Union Latin Business Association Los Angeles Latino Chamber of Commerce National Council of La Raza Pico Rivera Chamber of Commerce PolicyLink Professional & Technical Engineers, IFPTE Local 21, AFL-CIO Riverside County Black Chamber of Commerce San Francisco Office of the Treasurer and Tax Collector Service Employees International Union, Local 1000 Service Employees International Union, State Council Small Business Majority Social Action Commission of the African Methodist Episcopal Church South Asian Business Alliance Network State Building and Construction Trades Council of California UNITE-HERE, AFL-CIO United Domestic Workers of America, American Federation of State, County and Municipal Employees, Local 3930 United Ways of California Utilities Workers Union of America, Local 132, AFL-CIO Vasquez & Company, LLP Ward Economic Development Corporation Women's Institute for a Secure Retirement OPPOSITION: (Verified8/19/16) Financial Services Institute SB 1234 Page 11 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 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 SB 1234 Page 12 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. ARGUMENTS IN OPPOSITION: According to the Financial Services Institute: Financial advisors provide group retirement plans to private employers and individual plans to employees who lack access to an employer provided retirement plan. These advisors work closely with clients to develop individually-tailored retirement plans that are much better suited to achieving the client's retirement goals than a "one size fits all" approach. In contrast, necessity demands that state-run retirement vehicles be managed in the best interest of the group instead of the individual participants. 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. ASSEMBLY FLOOR: 52-26, 8/25/16 AYES: Alejo, Arambula, Atkins, Bloom, Bonilla, Bonta, Brown, Calderon, Campos, Chau, Chiu, Chu, Cooley, Cooper, Dababneh, Daly, Dodd, Eggman, Frazier, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Roger Hernández, Holden, Irwin, Jones-Sawyer, Lackey, Levine, Linder, Lopez, Low, McCarty, Medina, Mullin, Nazarian, O'Donnell, Quirk, Ridley-Thomas, Rodriguez, Santiago, Mark Stone, Thurmond, Ting, Weber, Williams, Wood, Rendon SB 1234 Page 13 NOES: Achadjian, Travis Allen, Baker, Bigelow, Brough, Chang, Chávez, Dahle, Beth Gaines, Gallagher, Grove, Hadley, Harper, Jones, Kim, Maienschein, Mathis, Mayes, Melendez, Obernolte, Patterson, Salas, Steinorth, Wagner, Waldron, Wilk NO VOTE RECORDED: Burke, Olsen Prepared by:Pamela Schneider / P.E. & R. / (916) 651-1519 8/25/16 18:00:20 **** END ****