BILL ANALYSIS Ó
SENATE COMMITTEE ON
PUBLIC EMPLOYMENT AND RETIREMENT
Dr. Richard Pan, Chair
2015 - 2016 Regular
Bill No: SB 1297 Hearing Date: 4/20/16
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|Author: |Pan |
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|Version: |4/19/16 As amended |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Pamela Schneider |
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Subject: Public employee retirement plans: automatic enrollment
and escalation
SOURCE: Empower Retirement: Great-West Life & Annuity
Insurance Company
DIGEST: This bill creates a framework for public employers
and employees, through the collective bargaining process, to
negotiate automatic enrollment and escalation of employee
contributions into supplemental retirement savings plans
(SRSPs). The bill also requires employers and employees to
negotiate the default plan for automatic enrollment and sets
requirements for the default plan, as specified.
ANALYSIS:
Existing law:
1)Establishes various collective bargaining statutes that apply
to public employees (e.g., the Ralph C. Dills Act for state
employees and the Meyers Milias Brown Act for local agency
employees, among others).
2)Requires that employers and employees collectively bargain
over matters impacting wages and working conditions.
3)Establishes, under the Internal Revenue Code, various employer
sponsored SRSPs that may be provided to employees (e.g.,
401(k), 457, and 403(b) plans).
SB 1297 (Pan) Page 2 of ?
This bill:
1)Defines terms, including the following:
a) "Automatic enrollment" means a SRSP under which an
employee will have a contribution made to the SRSP unless
the employee elects either to not contribute or to have a
different contribution amount, as specified.
b) "Automatic escalation" means a provision under which the
employee's contribution is increased annually in a
specified amount unless the employee elects not to either
not contribute or to have a different contribution amount.
c) "Capital preservation account" means an investment
product designed to preserve capital and provide liquidity,
as specified.
d) "Default investment option" means the investment option
that the employee's funds will be invested in unless the
employee chooses another investment option.
e) "Default investment plan" is the investment plan that
provides the default investment option.
2)Applies to all state and local public employee supplemental
retirement savings plans and to their participating employers
and must comply with applicable provisions of the Internal
Revenue code and Revenue and Taxation Code.
3)States that a public employer may make a deduction from
employees' compensation attributable to automatic enrollment
and automatic escalation in the SRSP under the following
conditions:
a) The deduction has been agreed to in a collective
bargaining agreement.
b) The bargaining agreement includes the percentage amount
of automatic deduction and, if applicable, the amount and
time periods of automatic escalation.
4)Specifies that the employer must provide for a default
investment plan and default investment option that meet the
SB 1297 (Pan) Page 3 of ?
following criteria:
a) The default investment plan has been agreed to in the
collective bargaining agreement. The agreement may specify
a specific default investment option or allow the default
investment plan administrator to select the default
investment option.
b) The default investment option must meet the federal
definition of a "qualified default investment alternative."
c) The default investment option must not impose fees or
surrender charges in connection with withdrawals initiated
by the plan participant or beneficiary.
d) Conditions set out in federal regulations providing for
fiduciary relief in the selection of the default investment
option are met, as specified.
e) The default investment plan offers a broad range of
investment alternatives and provides the employee at least
quarterly opportunities to select investments.
f) The employee is given notice of investment decisions
that will be made on behalf of the employee in the absence
of direction, a description of other investment
alternatives under the plan, and a description of how to
change investments.
g) The employee is given notice of an opt-out period of no
less than 30 days prior to the first automatic
contribution.
h) The employee is given notice of a 90 day period
following the first automatic contribution in which to
withdraw or transfer contributions without incurring fees
or costs in connection with the liquidation or transfer.
i) Allows a capital preservation account, as specified, to
serve as the default investment option for up to 120 days
following the first contribution, as specified.
j) Specifies that the default investment option for state
employees that participate in the state Savings Plus
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Program shall be the default investment determined by the
Savings Plus Program.
5)Indemnifies, with regard to the default investment only, the
employer or retirement savings plan official that provides
automatic enrollment or escalation when it is subject to the
requirements set forth in the bill.
6)Specifies that during the minimum 30 day period prior to the
employee's first automatic deduction, that employee may opt
out of the program or choose another investment than the
default investment option
7)Specifies that an employee will have 90 days following the
first automatic deduction to withdraw from the program and
have his or her deductions liquidated or transferred without
fees, penalties, or surrender charges, as specified.
8)Specifies that the employee shall have the opportunity to
choose an investment amount other than the amount determined
for automatic enrollment and escalation.
9)Requires that automatic enrollment and escalation must be
bargained and the employer may not impose such an arrangement
on employees following impasse in the collective bargaining
process.
10)Specifies that an employer that agrees with represented
employees to provide automatic enrollment and escalation may
also include related non-represented employees in the program.
11)Requires that an employer shall not make employer
contributions to an SRSP that implements automatic enrollment
and escalation at a greater rate for non-represented employees
than for related represented employees unless one of the
following applies:
a) The represented employees have agreed in a collective
bargaining agreement to no employer contribution or a lower
rate of employer contribution.
b) The represented employees have agreed in a collective
bargaining agreement to not participate in automatic
enrollment or escalation in the SRSP.
SB 1297 (Pan) Page 5 of ?
12)Requires that a collective bargaining agreement affecting
school employees must be affirmatively negotiated by the local
bargaining unit representing employees affected by the
agreement.
13)Specifies that the selected vendor for the default investment
plan may not use its relationship with participants in the
plan to market other products provided by the vendor that are
not included in the default investment plan.
14)Specifies that personnel acting on behalf of the employer,
including members of a governing body, may not receive
consideration from a vendor in exchange for the promotion of a
particular vendor or vendor's products, and requires that if
such consideration is determined to have occurred, the
bargaining contract shall be reopened and may be renegotiated.
15)Specifies that implementation of a collectively bargained
default plan and automatic enrollment is not intended to limit
investment choices that employees would otherwise have.
Investment plans that were available to employees prior to
automatic enrollment into a default plan shall not be reduced
or eliminated as a direct result of implementing automatic
enrollment.
16)Specifies that an employee that contributes to a SRSP other
than the default plan shall not have his or her contribution
to the other plan modified as a result of implementing
automatic enrollment in a default plan.
Background
Studies show that when employees are given the option to save in
SRSPs, there is an employee participation rate in the 30% to 40%
range. However, when employees are automatically enrolled in
SRSPs with the ability to opt out if they so choose,
participation is much higher, often in the 80% to 90% range.
The following examples are cited in the Final Report to the
California Secure Choice Retirement Savings Investment Board
(2016, http://www.treasurer.ca.gov/scib/report.pdf ): a 2015
Vanguard study found that participation rates more than doubled
from 42% to approximately 90% when new hires were automatically
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enrolled in SRSPs; a survey of plan sponsors using automatic
enrollment by the Defined Contribution Institutional Investment
Association found that two-thirds of those sampled had opt-out
rates of 9% or less; and the National Employment Savings Trust
in the United Kingdom (which uses automatic enrollment but
allows employees to opt out) found that from October 2012 to
August 2015, the program experienced an opt-out rate of
approximately 10%.
The Pension Protection Act of 2006 added a new section to ERISA
to provide that a participant in an individual account plan
shall be treated as exercising control over the assets in the
account with respect to the amount of contributions and earnings
which, in the absence of an investment election by the
participant (such as with automatic enrollment), are invested by
the plan in accordance with regulations prescribed by the
Secretary of Labor.
In 2007, the federal Department of Labor released a final
regulation defining rules for qualified default investment
alternatives (QDIAs). A fiduciary of a plan that complies with
the regulations shall not be liable for any loss, or by reason
of any breach, that occurs as a result of investment in the
QDIA. The regulation describes the types of investments that
qualify as default investment alternatives. Among other
requirements, the rules require notification periods before
starting auto enrollment and allowing employees to opt out or
select an investment other than the default investment.
Employees must also be able to transfer assets from the QDIA to
another investment alternative under the plan without penalty,
and the plan must offer a variety of investment alternatives.
Employees must be able to change their minds within the first 90
days of auto enrollment and withdraw or transfer their
contributions without restriction or penalty.
Finally, represented employees already have the ability to
collectively bargain automatic enrollment in an SRSP for their
members. However, according to the sponsor, existing law does
not allow automatic escalation or allow for inclusion of
non-represented employees. In addition, state law does not
currently set standards for the default investment option.
While a conscientious employer would be likely to adhere to the
federal guidelines for selection of the default option in order
to indemnify itself, that adherence is not required.
SB 1297 (Pan) Page 7 of ?
Related/Prior Legislation
SB 1234 (DeLeón, 2016), currently in Senate Appropriations
committee, will implement the Secure Choice Retirement Savings
Plan for private employees, which will automatically enroll
specified private sector employees into a retirement savings
plan. Employees will have the ability to opt out of enrollment
if they so choose.
FISCAL EFFECT: Appropriation: No Fiscal
Com.: Yes Local: No
SUPPORT:
Empower Retirement: Great-West Life & Annuity Insurance Company
(source)
California Correctional Peace Officers Association
California Professional Firefighters
OPPOSITION:
American Fidelity
AXA Equitable Financial Services
Lincoln Investment
National Tax-Deferred Savings Association
PlanMember Services
US Employee Benefits Services Group
US Retirement Partners
USD Insurance and Financial Services
Variable Annuity Life Insurance Company
NEUTRAL:
Association of California Life and Health Insurance Companies
ARGUMENTS IN SUPPORT:
According to the author:
While most public employees have defined benefit (DB) plans
to provide part of their retirement security, in most cases
a DB benefit will not entirely replace an employee's salary
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at retirement. Personal retirement savings, and for some,
Social Security, make up the other legs of an employee's
three-legged retirement stool.
For example, a non-safety employee who is a member of
CalPERS and subject to the Public Employees' Pension Reform
Act of 2013 will need to work 30 years to be able to
replace 60% of his or her compensation at age 62. Social
Security could make up an additional portion of necessary
retirement income-approximately 15% to 25% depending on age
at retirement and lifetime average earnings.
However, not everyone can work for 30 years in their public
service jobs. Women are more likely than men, for example, to
take time out to care for family members or take care of young
children. Many public workers, including teachers and public
safety officers, receive very little or no Social Security at
retirement. Personal retirement savings help to ensure that an
individual will have enough total retirement income when the
time comes to stop working.
As stated by the sponsor:
"The Department of Labor Pension Protection Act of 2006 paved
the way for employers to use the auto-enroll method of plan
design to encourage participation in their plan." "This bill
will allow plan sponsors to implement auto enroll through the
collective bargaining process for represented employees as well
as allowing auto enrollment for those employees who are not
represented."
ARGUMENTS IN OPPOSITION:
As stated by American Fidelity:
SB 1297 would make a substantial public policy change by
adding a new article to the Government Code which would
allow state and local public entities to automatically
enroll their employees into an employee-paid supplemental
retirement plan chosen in whole or in part by the employer.
This proposal is a severe departure from current law which
specifically empowers employees of state and local
governments to freely choose where and when to invest their
own dollars.
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Insurance Code Section 770.3 was enacted over 30 years ago
to ensure choice of vendors for such programs. We view SB
1297 as limiting the "freedom of choice" principle that was
designed to protect public employees.