BILL ANALYSIS Ó
SENATE PUBLIC EMPLOYMENT & RETIREMENT BILL NO: SB 1234
Gloria Negrete McLeod, ChairHearing date: April 16, 2012
SB 1234 (De León) as amended 3/27/12 FISCAL: YES
CALIFORNIA SECURE CHOICE RETIREMENT SAVINGS PLAN FOR PRIVATE
WORKERS
HISTORY :
Sponsor: Author
Prior legislation: AB 2940 (De Leon), 2008
Died in Senate Appropriations Committee
AB 125 (De Leon), 2009
Died in Senate Appropriations Committee
SUMMARY :
SB 1234 establishes the California Secure Choice Retirement
Savings Investment Board (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 the California Secure Choice
Retirement Savings Plan (SCRSP). SCRSP will exist to provide
a statewide retirement savings plan for private workers who
do not participate in any other type of employer sponsored
retirement savings plan. Contributions by employers and
employees will be voluntary.
In order for SCRSP to become operational, SB 1234 requires
that the Board conduct a market analysis to determine various
factors in regard to implementing the program and to report
to the Legislature on its findings; the analysis may be done
only if sufficient funds to do so are made available through
a non-profit or private entity, federal funding, or an annual
Budget Act appropriation.
Once created, administrative costs for the SCRSP shall be
paid for from earnings on investments into the trust and
shall be no more than 1 percent, annually, of the total
program fund assets.
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Date: 4/10/12 Page 1
BACKGROUND AND ANALYSIS :
1) This Bill :
a) creates the California Secure Choice Retirement Savings
Investment Board (Board), consisting of the following
members: the Treasurer, who also serves as the Chair of
the Board; the Director of Finance; the Controller; a
Senate appointee with retirement savings and investment
expertise; a small business representative and a public
member, each appointed by the Governor; and an employee
representative appointed by the Speaker of the Assembly.
b) defines the powers, duties, and obligations of the
Board, including the following:
i. Annual preparation and adoption of written
investment policies;
ii. Monthly investment reports covering types of
investments, entities managing the investments,
current market values of the fund, and a description
of compliance with the statement of investment policy;
iii. Approval of, and entering into, contracts with, an
investment management entity or entities, which could
be the California Public Employees' Retirement System
(CalPERS), or private investment managers, in order to
invest the Trust;
iv. Approval of, and entering into, contracts with a
private vendor or vendors to manage the individual
accounts;
v. The duty to procure insurance against loss in
connection with the property, assets, and activities
of the Trust, and to secure private underwriting to
insure the retirement savings benefit that is
guaranteed to plan participants;
vi. Annual adoption of a plan amendment prior to July
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1st in each plan year to declare the guaranteed rate
of interest for the following plan year;
vii. Establishment and management of a segregated Gain
and Loss Reserve Account, which would maintain a
reserve to cover guaranteed investment earnings when
actual earnings are insufficient;
viii.Creation of applicable payroll deposit
arrangements, including automatic deposits of employee
contributions and voluntary employer contributions to
the plan;
ix. Creation of a process for individuals or employees
of non-participating employers to contribute directly
to the plan on an individual basis;
x. Application of guidelines for the design and
establishment of retirement savings plans, including
consistency with established best practices, the
pooling of investment assets to achieve efficiencies
and economies of scale, and the establishment of
investment options that offer guaranteed returns and
can be converted to guaranteed retirement income
without incurring liabilities to the State; and
xi. A description of the various powers of the Board,
including entering into contracts, appointing a
program administrator and staff, setting minimum and
maximum investment levels, facilitating compliance
with Federal Internal Revenue Code and other
applicable laws, and adopting necessary regulations.
c) establishes the California Secure Choice Retirement
Savings Trust (Trust), in order to promote greater
retirement savings for private employees in a convenient,
voluntary, low-cost, and portable manner, and makes the
following requirements in regard to the Trust:
i. The Trust shall be self-sustaining and the
administrative costs shall be paid out of Trust
earnings.
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ii. Monies received by the Trust shall be continuously
appropriated and segregated into two funds: the
Program Fund and the Administrative Fund.
iii. Monies deposited into the Program Fund, as
determined by the Board, may be invested under
contract with CalPERS, private money managers, or a
combination.
iv. Monies in the Program Fund may be transferred to
the Administrative Fund to pay for operating costs,
and annual operating costs may not exceed one percent
of the total Program Fund.
v. A Gain and Loss Reserve Account shall be
established within the Program Fund to maintain a
reserve that would cover a particular year's
guaranteed return if actual investment returns are
insufficient. The Board shall determine goals for the
account and whether or not to allocate excess earnings
to the Gain and Loss Reserve Account based on
consideration of all of the following:
whether or not the plan has excess earnings;
the sufficiency of the Gain and Loss Reserve
Account in relation to the Board's goal for the
account;
amounts required for administrative costs;
and
amounts required for crediting participant
accounts at the stated interest rate.
d) defines the California Secure Choice Retirement Savings
Plan (SCRSP), and states certain requirements for the
design of the SCRSP, including the following:
i. SCRSP accounts shall be nominal accounts;
contributions shall be treated as credits to the
individual's account along with interest and any
additional earnings on the account. The individual
shall not have a specific right or claim to any
specific assets of the account.
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ii. Upon termination of coverage by SCRSP, the
balance of credits in the individual's account shall
determine the amount to which the individual is
entitled.
iii. Prior to July 1 of each plan year, the Board
shall set the rate of interest for the subsequent
year, and interest shall be credited to plan accounts
based on credits in the account and compounded daily.
iv. An individual's retirement savings shall be equal
to the credits in the account on the date the
retirement savings benefit becomes payable.
e) defines the requirements and obligations for
participating employers and employees, after the Board
opens the plan to participants, including the following:
i. An employer shall provide a payroll deposit
retirement savings arrangement to forward the
employees' contributions to the SCRSP. Employers may
also contribute to the SCRSP on behalf of employees
but such contributions are to be voluntary.
ii. Any eligible employer may participate
voluntarily, but participation is mandatory for
employers of more than 5 employees that do not provide
any other employer-sponsored retirement plan.
Beginning 3 months after SCRSP is open to
enrollments, employers of 100 or more must make the
SCRSP available.
Beginning 6 months after SCRSP is open to
enrollments, employers of 50 or more must make the
SCRSP available.
Beginning 9 months after SCRSP is open to
enrollments, employers of 5 or more must make the
SCRSP available.
i. All employers retain the option of offering a
different retirement plan for employees, such as a
401(k) plan, in which case they are not required to
participate in SCRSP.
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ii. Employers who, without good cause, fail to make
the SCRSP available to their employees on or before 90
days after notice has been given of failure to comply,
shall be assessed a penalty of $1,000 per employee not
offered the retirement savings plan.
iii. Excluded parties include public employers and
employees covered under the federal Railway Labor Act
or a valid collective bargaining agreement that
provides a pension plan governed by the federal
Employee Retirement Income Security Act.
iv. All individuals who are not excluded from
participation may participate through their employers
by automatic pre-tax payroll deductions. Individuals
who do not work for a participating employer may
enroll voluntarily and make contributions on an
after-tax basis.
v. Enrollment will be automatic, but employees may
opt out of the SCRSP by taking an affirmative action
to do so on an exemption certificate produced by the
Employment Development Department. An employee who
opts out will be automatically re-enrolled every 24
months or upon changing jobs. He or she will retain
the right to repeatedly opt out at any time.
vi. Participating employees shall contribute 3
percent of their annual wages to the SCRSP. The Board
may adjust this rate to between 2 and 4 percent
according to the length of time the employee has been
contributing to the SCRSP.
f) requires the investment manager to report certain
things to the Board each month, including types of
investments in the Trust fund and information related to
the types of investments, the weighted average maturity
of the investments in the fund, fund amounts under
private money managers, fund amounts under management by
CalPERS, the market value of the fund as of the date of
the report, and a description of compliance with the
investment policy set by the Board.
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g) makes various findings and declarations about the need
to save for retirement and threats to individuals and the
State posed by insufficient savings for retirement and
individuals' inability to retire, and states that
creation of the California Secure Choice Retirement
Savings Trust constitutes the carrying out of a valid and
vital public trust.
h) notes that individuals have limited access to
attractive financial products that can provide secure,
lifelong retirement income, and notes that employers face
significant barriers to setting up workplace retirement
plans.
i) requires that the provisions of this title shall only
become operative if funds are made through private,
non-profit or federal funding sufficient enough to allow
the Board to study, develop, and implement the title, and
the Board notifies the Department of Finance that the
provisions of the title can be self-sustaining.
2) Existing law :
a) establishes CalPERS, the state's largest public
retirement system with over $239 billion in assets,
providing worker and employer funded retirement benefits
for over 1.6 million public workers, retirees, and their
survivors and dependents.
b) empowers CalPERS with exclusive authority and fiduciary
responsibility to invest the Public Employees' Retirement
Fund in order to ensure the payment of benefits for
members and their survivors and to control costs for
participating employers.
c) prohibits, in the Constitution, the state from creating
debt or liability, as specified, without a vote of the
people.
c) allows individuals to save for retirement on a pre-tax
basis through payroll deductions when the employee is
eligible to enroll in an employer-sponsored retirement
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savings plan.
COMMENTS :
1) Can CalPERS invest the private monies in the SCSRP Trust ?
SB 1234 would allow the Board of the SCRSP to contract with
CalPERS or another entity to manage the investments in the
Trust. CalPERS would not be required to do so, and while
CalPERS could employ an investment strategy similar to its
investment strategy for the Public Employees' Retirement Fund
(PERF), the funds in the Trust would have to be held separate
from the funds in the PERF. Moreover, any investment
strategy would need to be consistent with the requirements
set forth by the SCRSP Board. Any cost relative to the
investment program for the SCRSP Trust would have to be paid
for out of the proceeds on the investments for the Trust; it
could not be paid for by returns on the PERF or any monies
contained in the PERF.
While CalPERS could manage the investments for the SCRSP
Trust, the bill intends for a private vendor, by contract, to
manage the member accounts, and for the Board to secure,
again by private contract, insurance products to guarantee
the lifetime annuities that would be promised to
participants.
2) Arguments in Support :
The author states the following:
"Today, due to inadequate retirement savings, nearly 50% of
middle-income California workers will face living in or
near poverty during their senior years. Social Security
payments alone are simply not enough to cover basic life
necessities, and over seven million workers in the private
sector currently do not have access to a retirement savings
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plan through their jobs.
Ensuring that all workers have the opportunity to save for
retirement will benefit all of society-in addition to
promoting personal responsibility and providing
Californians with a pathway to self-sufficiency in
retirement, it will alleviate the strain on our already
overburdened safety net programs as California's population
ages."
"Senate Bill 1234 seeks to create a vital supplement to
Social Security through the establishment of a retirement
savings plan for the seven million private sector workers
in California that lack a workplace retirement plan.
The proposed California Secure Choice Retirement Savings
Plan would be a cash balance-type plan, similar to the
Defined Benefit Supplement Program currently offered by the
California State Teachers' Retirement System (CalSTRS).
This type of retirement savings plan has a guaranteed rate
of return, and participants would not be exposed on the
individual market and vulnerable to the volatility of the
unpredictable stock market.
The guaranteed benefit would be closely tied to the
Treasury-bond (T-bond) rate, which is modest yet superior
to the interest rate currently offered by regular savings
accounts. The conservative and stable nature of the T-bond
rate ensures that the guarantee is extremely low-risk and
underwriters would provide insurance for the funding
liability. Also, since the retirement contributions would
be pooled and have an investment horizon that spans
multiple lifetimes, the professionally-managed fund will be
able to have a balanced portfolio and leverage economies of
scale to offer a retirement plan that is reliable,
low-cost, and completely portable for the participants.
In addition, I would like to highlight that the proposed
California Secure Choice Retirement Savings Plan would be
governed by the California Secure Choice Retirement Savings
Investment Board, a statewide governing board chaired by
the State Treasurer. This administration and oversight is
modeled after ScholarShare, California's 529 College
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Savings Plan, which is a professionally-managed fund that
has grown to over $4.4 Billion in assets and offers
families an opportunity to build savings to cover the costs
of higher education."
As stated by AARP:
"Social Security is the bedrock of all retirement plans.
For most Americans, Social Security is the only
defined-benefit plan they can count on to provide an income
stream that lasts a lifetime. But it isn't enough." "Some
are fortunate to have an employer-sponsored pension plan to
supplement Social Security, but most do not. Saving for
retirement on your own can be an expensive, risky
proposition. With inadequate investment expertise, high
fees charged by money managers, and a volatile stock
market, this is rarely a road to financial security in
retirement. This measure will provide a solid retirement
savings option for the many Californians."
According to the Greenlining Institute:
"Today, millions of Californians do not have the option to
save for retirement through payroll deductions.
Approximately six million Californians, roughly 43% of the
state's workforce, work at a job that does not offer them
a pension or a retirement savings plan to Supplement
Social Security. As a result, around 40% of today's baby
boomer retirees rely on Social Security benefits for more
than 90% of their income. However, Social Security
payments alone, which average $1,081 per month, will not
be enough to sustain Californians in their retirement."
3) Arguments in Opposition :
Opponents state the following:
"We are concerned about the operational questions and
potential liability issues the legislation creates.
Employers are uncertain as to how they would interface with
the newly created state entity."
"The effort, liability and expense of SB 1234 are
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unnecessary given that California already has a robust and
highly competitive retirement savings market. California
financial services firms - which directly employ 536,000
workers in the state and indirectly employ countless others
- currently offer a wide variety of retirement savings
alternatives, including 401(K) plans, 403(b) plans, 401(a)
plans, 457(b) plans, SIMPLE 3 IRAs, SEP IRAs, and
traditional IRAs. Smaller employers and individual
employees tend to gravitate to IRAs because they are
low-cost, straightforward and easy to administer. SB 1234
would create a new state-run structure that would directly
compete for business with a wide range of California
financial services firms and retirement plan providers.
This would directly affect the livelihoods of securities
firms and individual brokers, insurance and life insurance
companies and individual agents, plan providers and their
employees, and others in the financial services industry."
4) SUPPORT :
AARP
Association of California School Administrators (ACSA)
California Association of Psychiatric Technicians (CAPT)
California Faculty Association (CFA)
California Professional Firefighters (CPF)
California Teachers Association (CTA)
Congress of California Seniors (CCS)
Earned Assets Resource Network (EARN)
Faculty Association of California Community Colleges
(FACCC)
Greenlining Institute
Latinos for a Secure Retirement (LSR)
5) OPPOSITION :
American Council of Life Insurers
Association of California Life and Health Insurance
Companies
California Chamber of Commerce
California Grocers Association
California Manufacturers and Technology Association
California Small Business Association (CSBA)
Financial Services Institute
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Howard Jarvis Taxpayers Association (HJTA)
Insurance Brokers and Agents of the West
Investment Company Institute
Long Beach Area Chamber of Commerce
National Association of Insurance and Financial Advisors of
California
National Federation of Independent Business
Securities Industry and Financial Markets Association
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