BILL ANALYSIS
AB 125
Page 1
Date of Hearing: April 1, 2009
ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL
SECURITY
Ed Hernandez, Chair
AB 125 (De Leon) - As Introduced: January 15, 2009
SUBJECT : Retirement: California Employee Savings Program.
SUMMARY : Creates the California Employee Savings Program
(CalESP), under the administration of the California Public
Employees' Retirement System (CalPERS) to provide retirement
savings opportunities to California's private sector employees.
Specifically, this bill :
1)Establishes, under CalPERS, the CalESP intended to promote
greater retirement savings for California's private sector or
non-profit employees in a convenient, low-cost, and portable
manner.
2)Requires CalPERS to offer one or more individual retirement
accounts or annuities (IRAs) or defined benefit plans to
eligible employees of participating employers.
3)Specifies that participating employers and their eligible
employees are not members or participants of CalPERS and that
CalESP will not create a new public pension system.
4)Provides the following authorizations to CalPERS in order to
initiate, implement, maintain, and administer the CalESP:
a) Employ staff.
b) Contract with private financial institutions, other
financial and service providers, consultants, third-party
administrators, and other professionals.
c) Collaborate and cooperate with private financial
institutions, service providers, business, financial,
trade, membership, and other organizations for design,
implementation, and administration of the program and to
provide maximum outreach to eligible employers and eligible
employees.
d) Cause administrative expenses to be paid from
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contributions to, or investment returns or assets of the
program, except for expenditures that are provided for
through appropriations from the Legislature.
e) Facilitate compliance by the IRAs established under the
program with the Internal Revenue Code requirements,
including providing or arranging for assistance to plan
sponsors and individuals in complying with applicable law
and tax qualifications requirements in a cost-effective
manner.
f) Cause the IRA plans to be established in accordance with
best practices for retirement savings.
g) Seek to minimize costs by pooling small employers in
purchasing savings plans.
h) Arrange for pooling investment of assets of the IRA
plans in order to facilitate cost savings.
i) Provide educational materials relating to savings and
planning for retirement.
j) Provide information concerning tax credits to small
business owners, and those available to moderate and lower
income households.
aa) Submit progress and status reports to participating
employers and eligible employees.
bb) Determine the eligibility of employers, employees, or
other individuals.
cc) Create a process where employees who wish to participate
contact their employers to require them to forward the
contributions to the program. This may include the ability
to use the Employment Development Department (EDD) system
currently used to collect payroll taxes. EDD, if selected,
is required to forward the contribution to the IRA plan.
dd) Allow participating employers to contribute to the
account on behalf of employees, or to match employees'
contributions.
5)Authorizes EDD, to charge a fee for any administrative costs
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it incurs implementing or administering the program.
6)Requires all program expenses and obligations to be funded by
its contributions, returns, and assets, except as the
Legislature may appropriate funds for this purpose.
7)Requires CalPERS to keep separate and distinct any and all
programs, accounts, plans, or IRAs associated with CalESP and
prohibits any CalPERS defined benefit plan funds from being
used to implement or administer the CalESP.
8)Requires CalPERS to seek all necessary approvals, rulings,
determinations, or confirmations from federal entities,
including the Internal Revenue Service (IRS), the United
States Department of Labor, and the Securities and Exchange
Commission (SEC), to ensure the CalESP IRAs adhere to all
federal requirements regulating the operation of retirement
plans and the offering, sale, or distribution of securities
under those plans.
9)Prohibits any claim, tax lien, or other right of setoff from
applying to funds or assets of the CalESP, as specified.
10)Indemnifies, from the General Fund, and holds harmless
CalPERS board members and employees, and investment managers
under contract with CalPERS, with regard to any decisions or
actions made in connection with the CalESP, as specified.
11)Requires CalPERS to follow the process described below in
developing and implementing the program:
a) If adequate funding is made available, CalPERS will
conduct an economic feasibility study to determine whether
the necessary conditions for implementation can be met,
including, likely participation rates, participants'
comfort with various investment vehicles and degree of
risk, contribution levels, and the rate of account closures
and rollovers, and report its findings to the Legislature.
b) Upon completing study and reaching the conclusion that
the program is feasible, require CalPERS to request funding
for obtaining the necessary approvals and designing the
program, and report its findings to Legislature.
c) After completing the program design and obtaining the
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necessary approvals, CalPERS will request funding to
implement the program either through a Budget Act
appropriation of from a nonprofit or private entity.
12)Provides that the program may only be implemented if CalPERS
determines the following conditions are satisfied:
a) There is an adequate appropriation or loan under
appropriate terms and conditions to the CalESP
Administrative Fund sufficient to fund program development,
implementation, and administrative costs.
b) Approval is received from federal agencies such as the
IRS, the Department of Labor, and the SEC, as specified.
c) CalPERS obtains offers from well-qualified and
experienced financial service providers to administer the
recordkeeping, investment, and compliance functions of any
IRA plan or arrangement offered under the program.
d) The program is self-sustaining.
13)Requires CalPERS, upon determining that all the preconditions
necessary to implement the CalESP have been satisfied, to file
a report with the Legislature that includes information
regarding the expectations of the program, an outline of the
program, and details regarding the administration and
projected cost of the program.
14)Requires CalPERS, if a determination is made that all the
preconditions cannot be met, to not implement the program and
to file a report with the Legislature that includes the
details supporting its conclusion, including the legal,
financial, regulatory, and administrative considerations and
obstacles, and actions taken to address those concerns. The
report must also include suggested changes that CalPERS
believes would make it feasible to implement the program.
15)Requires CalPERS, upon implementation of the program, to
provide annual reports to the Legislature on the status of the
program, including outreach, investments, and solvency.
16)Requires CalPERS, if a determination is made that it is
necessary to suspend the CalESP, to submit a report to the
Legislature at least 90 days prior to the suspension. The
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report must include any conditional changes that could be made
by the Legislature in order to continue the program.
17)Authorizes CalPERS to adopt regulations necessary to
implement the CalESP and exempts those regulations from the
rulemaking provisions of the Administrative Procedure Act.
18)Requires CalPERS to report to the Legislature on the
feasibility of creating a defined benefit plan option
available to employers, only if the necessary funds are made
available through a budget appropriation, or sufficient funds
are provided by a nonprofit or private entity.
19)Specifies that the CalESP will only become operative if
sufficient funds are appropriated in the Budget Act or the
necessary funds are made available through a nonprofit or
private entity.
EXISTING FEDERAL LAW provides for tax-qualified retirement plans
and individual retirement accounts or individual retirement
annuities by which private citizens can save money for
retirement.
EXISTING STATE LAW establishes CalPERS to provide pension and
health benefits to a variety of public employees, including
state, local agency, and classified school employees.
FISCAL EFFECT : Unknown
COMMENTS : The following information was provided by the
author:
Currently, more than 70 million American workers do not
participate in an employer-sponsored retirement savings
plan. The numbers are more staggering for Californians.
Today, six million California employees, 41% of the state's
workforce, work at a job that does not offer a pension or a
retirement savings plan to supplement Social Security.
As a result, approximately 40% of today's baby boomers rely
on Social Security benefits for more than 90% of their
income. However, Social Security payments alone, which
average to $1,081 per month in California, will not be
enough to sustain Californians in their retirement. This
lack of retirement savings may equate to a higher cost for
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government services, as seniors without savings will be
more likely to require government assistance with housing,
medical care and other necessities.
Particularly, investments in savings accounts from small
business, low-income, and/or short-tenured and transferable
employees are exceptionally low.
Only 48% of part-time workers participate in a retirement
savings plan. Nearly 65% of low-income workers, those
earning less than $40,000, do not participate in employer
plans.
Often, complexity and cost on administering retirement
systems prevent many small companies from creating
retirement plans for their employees. A majority of firms
with fewer than 500 employees nationwide do not offer
retirement savings options.
Moreover, though some workers may currently participate in
a retirement plan, if that worker moves into a new job with
a new business, they often lose access to that same plan.
The result is gap coverage.
Workers today are spending more than they are saving,
relying more on credit, and thus accruing debt and risking
their future financial security. Nationally, the personal
savings rate for individuals has fallen to 0.5% of one's
income for 2007. At this rate, even with Social Security
benefits, Californians will not be able to afford
retirement.
Our savings habits must change, and even a small monthly
contribution can create a great financial advantage for
Californians. For example, if a 25 year-old saved $100 a
month, or $1,200 annually, with a 6.9% rate of return she
would have $233,474 at age 65.
California workers need a seamless, lifelong retirement
savings system, providing them with the opportunity to
build their assets and help attain their financial
stability through a secure, portable savings account. The
CalESP will create an option and system to do so,
supplementing existing savings options for its workers, at
no cost to taxpayers. While a few states have begun
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assessing these possibilities (e.g.,Washington, Illinois)
California would be the first state in the nation to
implement and provide this opportunity.
Opponents state, "While we support efforts to help consumers
achieve greater financial literacy, we have many concerns with
establishing a state-run system offering Simple IRA plans and
IRAs for employees of small employers and the self-employed. We
do not support the proposal in California to create state-run
Simple IRA plans or IRAs via CalPERS, as there is already a
competitive market among private providers of such portable
retirement solutions. CalPERS would incur significant startup
costs that it can ill afford during this economic downturn. It
is unrealistic to assert that fees on contributions and returns
or assets would be able to support the establishment and
administration of the program; rather, California taxpayers
would be forced to subsidize it. CalPERS would need to hire
staff or consultants to replicate the work of advisors in the
private sector, otherwise the state-run Simple IRA plans and
IRAs would be offered as no-load-type versions to
unsophisticated first-time investors without the needed guidance
and education."
Opponents conclude, "We believe a thorough and unbiased
compilation of the realistic and reasonable projected costs of
California state-run Simple IRA plans and IRAs, both initial and
ongoing, as well as the complications inherent in asking CalPERS
to offer such investment options to the private sector, is
needed prior to further legislative exploration of this
proposal. We would also hope that any study results would be
required to come back before the Legislature for its
consideration before a new statutory program could become
enacted."
This bill is similar to AB 2940 (De Leon) of 2008, which was
held in the Senate Appropriations Committee.
REGISTERED SUPPORT / OPPOSITION :
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Support
New America Foundation (Sponsor)
AARP (Co-sponsor)
American Federation of State, County and Municipal Employees
California Communities United Institute
City of Los Angeles
Small Business California
Opposition
Association of California Life and Health Insurance Companies
National Association of Insurance and Financial Advisors of
California
National Federation of Independent Business
Securities Industry and Financial Markets Association
Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916)
319-3957