BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
SB 1234 (De Leon/Steinberg) - Retirement savings plans.
Amended: May 2, 2012 Policy Vote: PE&R 3-1 L&IR 4-1
Urgency: No Mandate: No
Hearing Date: May 24, 2012 Consultant: Maureen Ortiz
SUSPENSE FILE. AS PROPOSED TO BE AMENDED.
Bill Summary: SB 1234 creates a state administered retirement
savings program for employees who lack access to an
employer-provided retirement plan to be known as the California
Secure Choice Retirement Savings Program. Employers with five
or more employees will be required to offer the new retirement
savings program to all employees according to a phase-in
schedule. Employees will be required to opt out if they decline
participation. SB 1234 will create a portable retirement
savings program that employees who are not otherwise covered by
a pension plan can make contributions to over their working
careers.
Fiscal Impact: Unknown costs for initial market analysis to
determine the feasibility of the program. SB 1234 provides that
these expenses will be funded from a nonprofit or private
entity, federal funding, or an annual Budget Act appropriation.
.
Unknown, potentially over $1 million in start-up costs for
promulgating regulations, market analysis and initial
start-up expenses (Private/General)
Unknown, multi-million annual administrative expenses to be
paid from earnings on the trust. (Special)
Approximately $465,000 in one-time costs for completing
form revisions and mailing information packets for the
Employment Development Department (Special Fund)
Although the intent of SB 1234 is for the program to be
self-funded and have the costs fully covered by investment
earnings, the feasibility of that funding will depend on the
level of participation, as well as the amount of assets in the
program. Therefore, it will most likely be necessary for the
State to appropriate or loan funds to cover the market analysis
phase, the start-up phase and an initial period of operation
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until the program becomes sustainable through earnings. SB 1234
allows donations from nonprofit or private entities, federal
funding, or an annual Budget Act appropriations for these
purposes.
Staff notes that in similar bills that have come before this
committee (AB 2940 De Leon in 2008, and AB 125 De Leon in 2009
which had required CalPERS to administer a similar program),
CalPERS had estimated initial study costs at approximately $1.69
million over an implementation period of 24 months. These
estimates included $1.2 million for 10.4 PYs to carry out the
professional and administrative tasks associated with developing
and evaluating various program elements including program
design, identifying customer service, participant education,
systems automation, accounting, auditing and financial reporting
costs, conducting market survey, legal services, and likely
costs for third-party administrator, trustee, investment and
marketing service providers. The cost estimate also included
approximately $75,000 to conduct the market survey to determine
likely participation rates, participants' comfort with various
investment vehicles and risk appetite, contribution levels, and
the rate of account closures and rollovers. The estimate for
obtaining tax and securities counsel to secure necessary federal
regulatory approvals were estimated at $500,000. It is likely
that expenses for the California Secure Choice Retirement
Savings Program will be similar.
The Employment Development Department has estimated one-time
costs to revise the DE 4 (Employees Withholding Allowance
Certificate), provide outreach to the employer community of
approximately 800,000 employers and provide informational
packets providing guidelines and instructions to employers of
about $465,000.
SB 1234 requires the board to initially conduct a market
analysis 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. The board may only conduct this
analysis if sufficient funds are made available through a
nonprofit or private entity, federal funding, or an annual
Budget Act appropriation.
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SB 1234 further provides that the implementation of the program
will not occur until funds are made available through a
nonprofit or private entity or federal funding in amounts
sufficient to allow the board to study, develop, and obtain the
approvals necessary to implement the program, and that the board
has notified the Director of Finance that, based on its market
analysis, the provisions of the program will be self-sustaining.
Background: The Employee Retirement Income Security Act of 1974
(ERISA) is a federal law that sets minimum standards for
retirement and health benefit plans in private industry. ERISA
does not require any employer to establish a plan, but requires
that those who establish plans must meet certain minimum
standards.
ERISA covers retirement, health and other welfare benefit plans
(e.g., life, disability and apprenticeship plans). Among other
things, ERISA provides that those individuals who manage plans
(and other fiduciaries) must meet certain standards of conduct.
The law also contains detailed provisions for reporting to the
government and disclosure to participants, and contains
provisions aimed at assuring that plan funds are protected and
that participants who qualify receive their benefits.
SB 1234 is patterned after The Secure Choice Pension program
developed by the National Conference on Public Employee
Retirement System as a program to enhance retirement security
and income. According to the Employee Benefit Research
Institute, the average American has a retirement savings deficit
of approximately $48,000 with an aggregate national retirement
savings shortfall of almost $4.6 trillion.
Proposed Law: SB 1234 contains the following provisions:
1) Contains Legislative findings and declarations outlying
the significance of California's workers' inability to
participate in an employer sponsored retirement savings
plan;
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2) Creates the California Secure Choice Retirement Savings
Investment Board to consist of the Treasurer, the Director
of Finance, the Controller, an individual with retirement
savings and investment expertise appointed by the Senate
Committee on Rules, a small business representative and a
public member each appointed by the Governor, and an
employee representative appointed by the Speaker of the
Assembly;
3) Defines the powers, duties, and obligations of the
board, including preparing a written statement of
investment policy and considering the policy at a public
hearing. The board will appoint a program administrator,
employ staff, retain and contract with the CalPERS board,
private financial institutions, other financial and service
providers, consultants, actuaries, counsel, auditors,
third-party administrators and other professionals as
necessary, as well as numerous other duties relating to the
administration of the trust;
4) Establishes the California Security Choice Retirement
Savings Trust, continuously appropriates the money in the
trust and separates it into the Program Fund and the
Administrative Fund;
5) Provides that all administrative expenses will be paid
from earnings of the trust, transferred from the program
fund, but limits expenditures from the administrative fund
to one percent of the total program fund;
6) Provides that all contributions paid by employees and
employers into the trust will be used to pay benefits to
participants, to administer the program, and to make
investments for the benefit of the program;
7) Gives the California Public Employees Retirement Board
the power to administer funds in the trust pursuant to a
contract with the California Secure Choice Retirement
Savings Investment Board;
8) Provides that the moneys in the program fund may be
invested by the Treasurer or under contract with the
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CalPERS Board of Administration or private money managers
as determined by the board; and,
9) Establishes the initial employee contribution rate at 3%
of the employee's annual salary or wages, but the board may
adjust that rate to any rate between 2%-4%, and authorizes
employers to also make contributions.
The California Secure Choice Retirement Savings Program shall
include one or more payroll deposit retirement savings
arrangements. Individual accounts will be nominal accounts and
any contributions will be treated as credits to the
participating member's account, together with interest. The
balance of credits in an individual's account will determine the
amount which he or she is entitled to upon termination of
coverage by the program. The program will be portable whereby
employees can continue to contribute uninterrupted if they
change jobs throughout their working career and be assured of a
constant benefit upon their final retirement in addition to
social security and other savings/investment options.
The Employment Development Department (EDD) will be required to
revise its exemption certificate to create an option for an
eligible employee to note his or her decision to opt out of the
California Secure Choice Retirement Savings Program effective
January 1, 2014. Employers will be subject to a $1,000 penalty
for each eligible employee that the program is not offered to,
enforced by the EDD.
Additionally, SB 1234 requires the establishment of a Gain and
Loss Reserve Account which may be used to credit interest for
program years in which the board determines that the stated
interest rate cannot be met from investment earnings. The board
will establish a goal for the balance of the reserve account and
may allocate excess earnings of the program to the reserve
account based on consideration of the following:
Whether or not the plan has excess earnings;
The sufficiency of the Account in relation to the board's goal
for the Account;
The amount required for the program's administrative costs;
and
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The amount required for crediting individuals' accounts at the
stated interest rate.
Before establishing the program, the board will need to adopt
regulations consistent with the federal Internal Revenue Code to
ensure that the program meets all criteria for federal
tax-deferral or tax-exempt benefits. SB 1234 also requires the
board to submit an annual audited financial report to the
Governor, the Controller, the State Auditor, and the
Legislature.
Eligible employees will be able to opt out of the program by
making a notation on the exemption certificate provided by the
Employment Development Department (EDD), but the bill provides
for an automatic re-enrollment after 24 months at which time the
employee may again opt out.
Employers who do not wish to offer the California Secure Choice
Retirement Savings Program may at any time offer employees an
alternative plan such as a 401(k) plan.
Staff Comments: Upon establishment of the California Secure
Choice Retirement Savings Investment Board, following are sample
items that must be considered before actual implementation of
the program:
a) How long will the program need to be operational before
earnings are sufficient to support the administrative expenses
of the program as required in the bill?
b) Where will the administrative funds come from in the
meantime?
c) Is the 1% cap for administrative expenses too low?
d) What fees will be charged to employees who choose to
participate including potential premiums to the Pension Benefit
Guaranty Corporation for insurance in the event the plan
terminates with insufficient assets, and providing that
employers do not pay these costs?
d) What safeguards will be in place to ensure adherence to
ERISA minimum funding guidelines?
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e) What will the terms of distribution of the funds be to
contributing employees upon retirement including the form of
benefits such as lifetime annuities and whether to offer death
or disability benefits?
SB 1234 authorizes the Investment Board to retain and contract
with the Board of Administration of CalPERS and/or to
collaborate with the CalPERS board for assistance with the
design, implementation and administration of the program. It
should be noted that if a collaborative relationship is
established between the new Investment Board and CalPERS, any
expenses incurred by CalPERS will need to be reimbursed as that
system will not be able to use any funds in the Public Employees
Retirement Fund for purposes of this new statewide program.
SB 1234 exempts the state from any liability for the payment of
the retirement savings benefit which is guaranteed to program
participants. Any financial liability for the payment of
benefits in excess of funds available under the program shall be
borne by the underwriters pursuant to the contract entered into
with the board on behalf of the program participants.
Ultimately, a secure private sector retirement program will
decrease existing and future costs to state and local
governments by reducing the need for retirees to rely on public
assistance programs.
Author's Amendments: Proposed amendments limit employer
liability, require employers to establish an open enrollment
period, reduce the employer penalty to $250, and authorize the
EDD to charge a fee to offset costs.