BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 1234|
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THIRD READING
Bill No: SB 1234
Author: De León (D) and Steinberg (D), et al.
Amended: 5/29/12
Vote: 21
SENATE PUBLIC EMPLOY. & RETIRE. COMM. : 3-1, 4/16/12
AYES: Negrete McLeod, Padilla, Vargas
NOES: Gaines
NO VOTE RECORDED: Walters
SENATE LABOR & INDUST. RELATIONS COMM. : 4-1, 4/25/12
AYES: Lieu, DeSaulnier, Leno, Yee
NOES: Wyland
NO VOTE RECORDED: Padilla, Runner
SENATE APPROPRIATIONS COMMITTEE : 5-2, 5/24/12
AYES: Kehoe, Alquist, Lieu, Price, Steinberg
NOES: Walters, Dutton
SUBJECT : Retirement savings plans
SOURCE : Author
DIGEST : This bill 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 Program
(SCRSP). SCRSP will exist to provide a statewide
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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, this bill requires that the Board conduct a
market analysis to determine various factors in regard to
implementing the SCRSP 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%, annually, of the
total program fund assets.
ANALYSIS : Existing federal law provides for
tax-qualified retirement plans and individual retirement
accounts or individual retirement annuities by which
private citizens may save money for retirement.
Existing state law:
1. Establishes California Public Employees' Retirement
System (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.
2. 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.
3. Prohibits, in the Constitution, the state from creating
debt or liability, as specified, without a vote of the
people.
4. 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
savings plan.
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According to a recent report by the University of
California, Berkeley Center for Labor Research and
Education, Meeting California's Retirement Security
Challenge (October 2011), 62% of private sector workers in
California do not participate in an employer-sponsored
retirement plan, compared to 57% in the United States as a
whole. Also, workers in small and medium sized firms are
disadvantaged in their access to employer-sponsored
retirement plans-in California, 84% of people working for
employers with 25 or fewer workers do not participate in a
retirement plan at work.
This bill establishes the California Secure Choice
Retirement Savings Investment Board (Board), as defined,
and the Trust, a continuously appropriated fund, for the
purpose of creating a statewide program known as the 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, this bill
requires that the Board conduct a market analysis to
determine various factors in regard to implementing the
SCRSP 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%, annually, of the total program
fund assets.
Specifics of this bill:
California Secure Choice Retirement Savings Investment
Board
Create the Trust, administered by the Board. This
governing and oversight board would be chaired by the
State Treasurer and modeled after ScholarShare,
California's 529 College Savings Plan.
In addition to the State Treasurer, the seven-member
Board would include the State Controller, Director of
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Finance, an individual with retirement savings and
investment experience appointed by the Senate Rules
Committee, a small business representative and a public
member each appointed by the Governor, and an employee
representative appointed by the Speaker of the Assembly.
In establishing the SCRSP, the Board would hire private
firms to manage the investment portfolio and the
retirement savings accounts, and also secure
underwriting through private insurers to guarantee the
rate of return on the retirement savings plans. CalPERS
would also be eligible to bid on the contract to manage
the investment portfolio provided it could form a
partnership with private vendors to handle the
day-to-day account management and obtain the necessary
private insurer underwriting.
Trust funds could only be used exclusively for the
purpose of paying benefits to program participants, for
program administration costs, and for investments made
for the benefit of the SCRSP.
Taxpayer Protections
Prior to the development of the SCRSP, direct the Board
to conduct a market analysis to determine the viability
of implementation, including the assessment of likely
participation rates, contribution levels, and the
feasibility of investment vehicles.
The market analysis would only be conducted if
sufficient funds are made available through a non-profit
or private entity, federal funding, or an annual Budget
Act appropriation for this purpose.
Following the market analysis, forward the Board's
findings to the Chairs of the Senate Public Employment
and Retirement Committee and the Assembly Public
Employees, Retirement and Social Security Committee.
The implementation of the SCRSP would only move forward
if the Board notifies the Director of Finance that based
on the market analysis the SCRSP will be completely
self-sustaining.
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Before studying, developing and obtaining the necessary
approvals to fully implement the SCRSP, the Board would
have to receive sufficient funding to cover start-up
costs through a non-profit, private entity, federal
funding, or an annual Budget Act appropriation.
Once fully implemented, the Trust would be
self-sustaining and extremely low-risk due to the modest
guaranteed benefit (likely tied to the 30-year
Treasury-bond rate) and long investment horizon. In
guaranteeing the rate of return for the retirement
savings plans, ensure zero-liability to the state by
requiring the Board to secure private underwriting and
reinsurance to manage risk.
There would be no state liability for the retirement
savings benefit that is guaranteed to program
participants. Any financial liability for the payment
of benefits that exceeds the funds available in the
SCRSP would be borne by the private underwriters
pursuant to the contract entered into with the Board on
behalf of program participants.
Disclosures for Employees and Employer Liability
Protections
Employees would receive a program information packet
with a disclosure form that includes the benefits and
risks of making retirement contributions, the mechanics
of how to participate or opt out of the SCRSP, the
process for the withdrawal of retirement savings, and
how to obtain additional information about the SCRSP.
The disclosure form would clearly inform employees that
employers are not liable for their decisions whether to
participate in or opt out of the SCRSP, or for employee
investment decisions, and state that their employer is
not a fiduciary of the Trust or SCRSPm, the employer
does not bear responsibility for how the SCRSP is
administered, and the employer is not liable with regard
to investment returns and benefits paid to program
participants.
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In addition, the disclosure form would notify employees
that their employers are not in a position to provide
financial advice, and that they should contact financial
advisors if they want to seek financial advice.
To notify employees that the state is not liable for
the retirement savings benefit, the form would also
specify that the program fund is privately insured and
is not guaranteed by the State of California.
Employees would be required to sign and date the
disclosure form acknowledging that they have read all of
the disclosures and understand their content.
Employee Participation in the SCRSP
When the Board officially opens the SCRSP for
enrollment, allow employers to voluntarily offer the S
to their employees and use their payroll system to
directly deposit employee contributions into the
retirement savings plan.
Phase-in employee participation into the SCRSP -only
employers that do not offer their own employer-sponsored
retirement plan (such as a 401(k)) or payroll deduction
IRA would have to perform the ministerial duty of
supplying the information packet with disclosure form,
and allowing employees to remit contributions through
payroll deduction:
o Employers with 100 or more employees: allow
employee participation within three months of the
Board opening the SCRSP for enrollment;
o Employers with 50 or more employees: within six
months;
o Employers with five or more employees: within
nine months.
Set the employee default savings amount at 3%, and
authorize the Board to adjust the amount between 2% to
4% and vary the amount according to the length of time
the employee has contributed to the SCRSP.
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Voluntary employee participation-employees that do not
want to enroll and make contributions to the SCRSP can
opt-out at any time.
At least once every two years, employers would
designate an "open enrollment period" during which
employees that previously opted-out would be given the
opportunity to enroll or opt-out again. Employees that
decide to opt-out of the SCRSP would only be able to
enroll or restart their participation during the
employer-designated open enrollment period.
Employees that already have access to a workplace
retirement plan can also voluntarily participate in the
SCRSP. However, their employer would not be obligated
to allow them to use their payroll system to make
automatic payroll deductions to the SCRSP.
Role of Employers
Unlike employer-sponsored retirement plans such as
401(k)s, employers participating in the SCRSP would not
bear any fiduciary responsibility and would not be
required to pay administrative fees or comply with
federal quarterly-reporting mandates.
Employers that opt to make the SCRSP available to their
employees would have the limited obligation of allowing
their employees to access their payroll system to make
reliable, systematic, automatic deductions to the SCRSP.
Voluntary employer contributions-employers
participating in the SCRSP would be allowed to use the
SCRSP to make contributions on their employees' behalf
or match their employees' contributions.
Employers would retain the option at all times to set
up and offer their own retirement plans instead of
permitting their employees' access to the SCRSP.
If the Employment Development Department (EDD) finds
through its investigation and audit function that an
employer is out of compliance, the employer would be
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given notice and allowed a 90-day grace period to comply
without penalty. Employers that are out of compliance
after 90 days would be required to pay a penalty of $250
per employee, and if an employer is found to be in
willful noncompliance 180 days or more after the notice,
there would be an additional penalty of $500 per
employee.
Role of the EDD
Direct the EDD to modify its exemption certificate form
to permit eligible employees to opt-out of participating
in the SCRSP.
EDD would provide outreach and marketing to the
employer community, and also facilitate the
dissemination of the employee information packet
designed by the Board.
The employer compliance provisions of this bill become
operative six months after the Board modifies the Director
of EDD that the full implementation of Title 21 will
proceed. Upon receipt of the notification from the Board,
the EDD shall immediately post on its Internet Web site a
notice starting that this section is operative, and the
date that it is first operative. If the EDD participates
in the implementation and administration of the SCRSP, it
may charge the Board a reasonable fee for costs it incurs
for implementing and administrating the SCRSP.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
SUPPORT : (Verified 5/25/12)
AARP-California
AFSCME, AFL-CIO
Association of California School Administrators
California Association of Psychiatric Technicians
California Faculty Association
California Labor Federation, AFL-CIO
California Professional Firefighters
California Retired County Employees Association
California School Employees Association
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California Teachers Association
Congress of California Seniors
Earned Assets Resource Network
Faculty Association of California Community Colleges
Greenlining Institute
JERICHO
Latinos for a Secure Retirement
National Conference on Public Employee Retirement Systems
National Hispanic Council on Aging
SEIU Local 99
State Association of County Retirement Systems
TELACU
OPPOSITION : (Verified 5/25/12)
American Council of Life Insurers
Association of California Life and Health Insurance
Companies
California Association of Health Underwriters
California Chamber of Commerce
California Farm Bureau Federation
California Grocers Association
California Independent Grocers Association
California Manufacturers and Technology Association
California Retailers Association
Financial Planners Association
Financial Services Institute
Fullerton Chamber of Commerce
Garden Grove Chamber of Commerce
Hispanic Engineers Business Corporation
Howard Jarvis Taxpayers Association
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
Orange Chamber of Commerce
Pacific Life Insurance Company
Plumbing-Heating-Cooling Contractors Association of
California
Securities Industry and Financial Markets Association
Small Business California
Western Electrical Contractors Association
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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 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
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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 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."
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
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with the newly created state entity.
The effort, liability and expense of SB 1234 are
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.
DLW:kc 5/29/12 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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