BILL ANALYSIS Ó
SB 1234
Page 1
Date of Hearing: July 3, 2012
ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL
SECURITY
Warren T. Furutani, Chair
SB 1234 (De Leon) - As Amended: June 27, 2012
SENATE VOTE : 23-13
SUBJECT : Retirement savings plans.
SUMMARY : Establishes the California Secure Choice Retirement
Savings Program (Program) to operate as a state-administered
retirement savings plan for private sector workers who do not
participate in any other type of employer-sponsored retirement
savings plan Specifically, this bill :
1)Establishes the California Secure Choice Retirement Savings
Investment Board (Board) to consist of the State Treasurer,
the Director of Finance (or his or her designee), the State
Controller, an individual with retirement savings and
investment expertise appointed by the Senate Committee on
Rules, a small business representative appointed by the
Governor, a public member appointed by the Governor, and an
employee representative appointed by the Speaker of the
Assembly.
2)Requires the Board to conduct an initial market analysis to
determine whether the necessary conditions for implementation
of the Program can be met, as specified.
3)Provides that the Program will only become operative if the
Board notifies the Director of Finance that, based upon the
market analysis, the Program can be self-sustaining and only
if implementation costs are made available from a nonprofit or
private entity, the federal government, or a budget
appropriation.
4)Requires the Board to forward and offer to present the
findings of the market analysis to the Chair of the Senate
Committee on Labor and Industrial Relations, the Chair of the
Assembly Committee on Labor and Employment, the Chair of the
Senate Committee on Public Employment and Retirement, and the
Chair of the Assembly Committee on Public Employees,
Retirement and Social Security.
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5)Establishes the Program to include one or more individual
retirement account (IRA) arrangements for private sector
employees to operate under the following parameters:
a) Individual accounts under the program shall be nominal
accounts and contributions shall be treated as credits to
an individual's account along with interest and any
additional earnings.
b) The balance of the credits in an individual's account
shall determine the amount to which they are entitled under
the Program upon termination.
c) Requires the Board, prior to July 1 of the initial
Program year and annually thereafter, to adopt a Program
amendment to declare the stated rate at which interest
shall be credited to accounts for the following year.
d) Provides that an individual's retirement savings benefit
under the Program shall be an amount equal to the balance
of the credits in the individual's program account on the
date the retirement savings account becomes payable.
e) Requires the Board to set minimum and maximum investment
levels in accordance with contribution limits set forth for
IRAs by the Internal Revenue Code.
f) Authorizes the Board to allow participating employers to
use the Program to contribute to their employees'
individual retirement accounts on their employees' behalf
or match their employees' contributions, provided that the
contributions would be permitted under the Internal Revenue
Code and would not cause the program to be treated as an
employee benefit plan under the Employee Retirement Income
Security Act (ERISA).
6)Provides that after the Board opens the Program for
enrollment, any employer may choose to have a payroll deposit
retirement savings arrangement to allow employee participation
in the Program. Thereafter the following timeline would
apply:
a) Beginning three months after opening of enrollment,
employers of 100 or more employees must have an arrangement
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to allow employees to participate in the Program.
b) Beginning six months after opening of enrollment,
employers of 50 or more employees must have an arrangement
to allow employees to participate in the Program.
c) Beginning nine months after opening of enrollment,
employers of five or more employees must have an
arrangement to allow employees to participate in the
Program.
7)Requires the Board, prior to opening the Program for
enrollment, to disseminate an employee information packet and
disclosure form to employers that, among other things, clearly
articulates that the program is privately insured and not
guaranteed by the State of California.
8)Provides that an employer who, without good cause, fails to
allow its employees to participate in the Program within 90
days after being notified of failure to comply by the
Employment Development Department, shall pay a penalty of $250
per eligible employee. If the employer if found to be in
willful noncompliance 180 days after the notice shall be
subject to an additional penalty of $500 per eligible
employee.
9)Requires each eligible employee to be enrolled in the Program
unless the employee opts out as specified, and provides for an
open enrollment period.
10)Provides that, unless otherwise specified by the employee, a
participating employee shall contribute 3% of their annual
salary or wages into the Program (which may be adjusted by the
Board to between 2% and 4%).
11)Establishes a trust (Trust) to be administered by the Board
and requires moneys to be segregated into a program fund and
an administrative fund. Annual expenditures from the
administrative fund shall not exceed more than 1% of the total
program fund.
12)Establishes guiding principles and restrictions for
investment policy of Trust assets, and limits the types of
investments which shall be permitted for the investment of
funds.
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13)Provides that equities shall not exceed 50% of the overall
asset allocation of the fund.
14)Provides that employers shall not have any liability for an
employee's decision to participate or opt out of the Program,
or for the investment decisions of employees.
15)Provides that employers shall not be a fiduciary over the
Program and shall bear no responsibility for the
administration, investment, or investment performance of the
Program. An employer shall not be liable with regard to
investment returns, program design, and benefits paid to
participants.
16)Requires the Board to submit an annual independently-audited
financial report, as specified.
17)Provides that the state shall not have any liability for the
payment of the retirement savings benefit guaranteed to
Program participants. Any financial liability for the payment
of benefits in excess of funds available shall be borne by
insurance underwriters pursuant to a contract entered into
with the Board, as specified. The state, and any of the funds
of the state, shall have no obligation for payment of the
guaranteed benefits arising from the program.
18)Requires the Board (prior to opening the Program for
enrollment), if there is sufficient interest by vendors to
participate and provide the necessary funding, to establish a
Retirement Investments Clearinghouse ("Clearinghouse") on its
Internet Web site. The Clearinghouse, among other features,
would contain the following:
a) Information about employer-sponsored retirement plans,
and payroll deduction individual retirement accounts and
annuities offered by private sector providers.
b) Specified other information, including investment
performance, fees, and other information.
19)Contains specific requirements for vendors to participate and
register in the Clearinghouse, and a process for the addition
and removal of vendors.
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20)Requires the Board to include notice of the existence of the
Clearinghouse on a notice to eligible employers disseminated
through EDD.
21)Provides that the Board and the Program are not responsible
for or liable for the adequacy of information on the
Clearinghouse, as specified.
22)Makes related and conforming changes to implement the
provisions of this bill.
23)Makes related legislative findings and declarations.
FISCAL EFFECT : Unknown.
COMMENTS : This bill would establish a supplemental retirement
savings program for California's private sector workers that do
not have access to retirement plans through their jobs. The
author states that the program created by this bill would
provide a reliable, affordable and completely portable
retirement savings plan for the millions of Californians without
access to a workplace retirement plan.
For private sector employees, the American retirement system has
traditionally relied upon a three-prong approach - Social
Security benefits, private savings and employer-provided
pensions. Therefore, a large component of the traditional
retirement system was an employer-based retirement component,
which was generally provided through a defined benefit pension
where the benefit was defined by years of service and the final
wages of the employee. By some estimates, as recently as 25
years ago more than 80% of large and mid-sized employers offered
a defined benefit pension. Today, less than a third of such
employers offer such a pension.
In recent decades, employer-sponsored defined benefit pensions
have been largely replaced by defined contributions pensions
such as 401(k) and 457 retirement plans. In these plans,
employees generally make their own decisions about how the funds
are invested, taking on the entirety of the risk of their own
retirement savings. While these plans are portable and have
certain tax advantages, critics have pointed out that the nature
of the risk shift leaves workers with the sole responsibility of
making investment decisions (for which they may or may not be
prepared) and leaves nest eggs vulnerable to shifts in the stock
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market (of which recent retirees are painfully aware).
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.
As introduced, the Program proposed under this bill would have
most closely followed the structure of a cash-balance retirement
type plan. With a cash-balance retirement plan, the plan tries
to blend components of a defined benefit and defined
contribution plan by providing a guaranteed benefit, but tying
that guaranteed benefit to a balance in the account.
However, with recent amendments the author has specified that
the retirement savings program designed by the Board would be
individual retirement accounts or individual retirement
annuities, with employee contribution limits which are the same
as IRAs. The amendments also specify that voluntary employer
contributions would only be allowed if they are permitted under
the Internal Revenue Code and would not cause the Program to be
treated as an employee benefit pension plan under ERISA.
Similar to the CalSTRS cash-balance type retirement plan, this
bill also requires the creation of a Gain and Loss Reserve
Account, which brings in money during good years and disburses
money during bad years in order to credit the rate of interest
set by the Board. Such decisions would be based on an annual
actuarial valuation. Additionally, this bill requires the Board
to purchase insurance against any loss and secure underwriting
to insure that the benefits are paid to participants.
The actual day-to-day operation of the Program is left largely
unspecified in the bill. There are allowances for the
appointment of a Program Administrator and staff, but there is
also the flexibility to retain or contract with CalPERS and/or
private financial institutions "as necessary". Finally, there's
also a catch-all to allow for collaboration with CalPERS and
private entities for outreach and administration.
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This bill provides that each eligible employee shall be enrolled
in the Program unless the employee elects not to participate.
An eligible employee may elect to opt out of the Program by
making a notation on an exemption certificate produced by EDD.
The bill also provides that, at least once every two years,
participating employers shall designate an open enrollment
period during which eligible employees that previously opted out
of the Program shall be enrolled unless the employee again
elects to opt out.
The bill provides that an employee who elects to opt out of the
Program who subsequently wants to participate through the
employer's payroll deposit retirement savings arrangement may
only enroll during the employer's designated open enrollment
period or if permitted by the employer at an earlier time.
Finally, an eligible employee may also terminate his or her
participation in the Program at any time in a manner prescribed
by the Board and thereafter by making a notation on the
exemption certificate produced by EDD.
According to the author, the opt-out nature of this bill
conforms to recent research that suggests that individuals need
a "nudge" in the form of automatic enrollment in retirement
savings programs. According to information submitted by the
author, in one study comparing opt-in to automatic enrollment,
researchers found that participation rates in opt-in plans were
just 20% after three months, increasing to 65% after 36 months.
With automatic enrollment, by contrast, the rates were 90% and
98%, respectively.
The author states the following in support of this bill:
"Across the United States, millions of workers will retire
into poverty because they will not have enough in assets to
meet their basic needs in their senior years. Here in
California, nearly one-half of workers will face
significant economic hardship in retirement, with incomes
below 200% of the federal poverty threshold. The most
at-risk groups are young workers age 25-44 and low-income
workers, but even middle-income workers will be at
substantial risk of not having enough retirement income to
be self-sufficient.
Since the nation's personal savings rate is extremely low
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and retirement planning is now largely controlled by
private for-profit Wall Street investment firms, the United
States is staring at an economic time bomb that left
unaddressed will overwhelm taxpayer-funded entitlement and
other safety net programs. The lack of retirement savings
affects all Californians, as seniors without sufficient
retirement savings will more likely need to rely on
government assistance for housing, health care and other
basic necessities.
California workers in the private sector need a lifelong
retirement savings system that provides them with the
opportunity to build their assets and achieve financial
stability in retirement. The California Secure Choice
Retirement Savings Program would provide a vital supplement
to Social Security income by offering participants a
low-risk, low-cost, and completely portable retirement
savings plan that will have a guaranteed interest rate on
their retirement savings.
Employers that want to offer their employees a retirement
savings plan also need a way to help their employees save
for retirement. Private sector employers often face
significant barriers in setting up their own workplace
retirement plans-in addition to the costs of hiring service
providers and paying service fees, plans such as 401(k)s
can be complex to maintain and administer, employers must
accept fiduciary responsibility, and they are subject to an
array of rules and regulations.
Under the California Secure Choice Retirement Savings
Program, voluntary contributions from employees and
employers would be pooled into a professionally-managed
retirement fund that leverages economies of scale and
longer investment horizons to offer every California worker
the chance to enroll in a retirement savings plan.
Here in California, over 6.3 million private sector workers
do not have access to a retirement plan at their place of
employment. If these workers contributed 3% of their
earnings towards a retirement fund, the fund would have
over $6 billion to invest in the first year alone."
The author also contends that this bill contains the following
protections for California taxpayers:
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"Prior to the development of the California Secure Choice
Retirement Savings Program, 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 California Secure Choice
Retirement Savings Program would only move forward if the
Board notifies the Director of Finance that based on the
market analysis the program will be completely
self-sustaining.
Before studying, developing and obtaining the necessary
approvals to fully implement the California Secure Choice
Retirement Savings Program, 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 California Secure Choice
Retirement Savings 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 program would be borne
by the private underwriters pursuant to the contract
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entered into with the Board on behalf of program
participants."
The author also argues that the bill contains the following
protections for employers and employees:
"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 program, the process for the
withdrawal of retirement savings, and how to obtain
additional information about the program.
The disclosure form would clearly inform employees that
employers are not liable for their decisions whether to
participate in or opt out of the program, or for employee
investment decisions, and state that their employer is not
a fiduciary of the California Secure Choice Retirement
Savings Trust or program, the employer does not bear
responsibility for how the program is administered, and the
employer is not liable with regard to investment returns
and benefits paid to program participants.
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."
Opponents, including the Securities Industry and Financial
Markets Association, (in a letter submitted before the most
recent amendments) argue that California already faces hundreds
of billions of dollars in unfunded pension liability for its
public sector workers. They contend that now is not the time
for the state to create and assume liability for any new plan
for private sector employees. Moreover, they contend that the
legislation is unnecessary as California already has a robust
and highly competitive retirement savings market.
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Opponents contend that, among other things, this bill could
create undue pressure on the General Fund, could create a
multi-billion dollar liability for the state, unnecessarily
enters the federal government's domain, and is inconsistent with
the Administration's efforts to reduce government.
Opponents also argue that this bill continues to raise problems
for the small employers by imposing a mandated benefit rather
than giving employers the flexibility to offer the mix of
compensation and benefits that best meets the needs of their
employees. They note that this bill seeks to eliminate an
employer's potential federal liability and responsibility but do
not believe that a state bill has that authority under federal
law (ERISA or the Internal Revenue Code).
Opponents also state that recent amendments reduce but do not
eliminate the employers' operational responsibilities and
compliance costs. Employers will still have to distribute
information, answer questions, collect opt-out forms, and
transfer contributions to the Program.
Opponents object that this bill raises "serious cost issues."
"Initial costs to study and develop the program and to
obtain the necessary federal approvals will likely be
significant. Such costs will increase dramatically if the
program faces a legal challenge. While this bill sets
aside one percent (1%) of the total program fund to
administer the program trust on an ongoing basis, it is
highly likely that administrative, compliance, insurance,
premiums and other costs will exceed that amount."
Opponents contend that the guaranteed rate of return on
investment creates the very real possibility that the state will
have to fill the gap between the promised and the realized rates
of return. Insurance - which, of course, comes at a cost - may
assist in this process, but the ultimate responsibility rests
with the state, either as an explicit or "implied" guarantee.
With respect to potential "funding shortfalls" opponents state
the following:
"As with any defined benefit plan, the employer/plan
sponsor bears investment risk. Changes in the value of the
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plan's investments (usually managed by the employer or an
investment manager) generally do not affect the amount of
benefits owed to participants. The funding rules for
defined benefit plans also apply to cash balance plans.
Under a cash balance plan, funding obligations are
determined actuarially based on the plan's benefit
commitments which include interest credits, the value of
the plan's asset and expected plan demographic experience.
Required contributions do not necessarily equal the sum of
contributions to the hypothetical accounts. Under the
Program, based on annual actuarial valuations of plan
assets, if participant contributions to the plan do not
equal the required minimum funding obligation for a year
based on the funding rules, then additional contributions
must be made."
"Under the bill, the Board is directed to annually adopt a
statement of investment policy and to select an investment
management entity or entities. However, it does not
address who is responsible for any funding shortfalls.
Generally, under the Ýfederal law] provisions applicable to
multiple employer plans, each employer is treated as
maintaining a separate plan for purposes of minimum funding
standards. This would suggest that each participating
employer will be left liable for any funding deficiencies.
What if a participating employer has gone out of business?
What if the employer no longer employs any participating
employees?"
"Sponsors of the bill counter that an insurance policy will
address this issue. The state assumes the existence of an
insurance policy that would cover market risk regarding the
assets, longevity risk (because defined benefit plans must
offer an annuity form of payment), benefit guarantees set
by the Board, and a risk regarding administration. If this
type of coverage is available, we expect it will be very
expensive. This expense would also likely be paid from the
administrative fund, which has the 1% limit on expenses
cited above. Note however, that even if an insurer did
cover these costs, ERISA would not shift liability to the
insurer; the participating employer would retain liability
for payment of any underfunding. This is significant
because in the event the insurance contract is discontinued
or for some reason the specifics of the contract do not
require payment in any case, the participating employer is
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the entity who would be left responsible for these amounts
under the federal tax code."
Opponents conclude that, "In the case of a market downturn, such
as occurred in 2008, a devastating funding shortfall would be
likely. The liability will be left to a state which is already
struggling financially, or to California employers who were
forced to participate. We do not believe that an insurance
contract is enough to address these significant concerns."
This bill is similar to AB 125 (De Leon) of 2009, and AB 2940
(DeLeon) of 2008, both of which would have created a California
Employee Savings Program to be administered by CalPERS. Both
bills were held in the Senate Committee on Appropriations.
REGISTERED SUPPORT / OPPOSITION :
Support
AARP-California
American Federation of State, County and Municipal Employees,
AFL-CIO
Association of California School Administrators
California Association of Highway Patrolmen
California Association of Professional Scientists
California Association of Psychiatric Technicians
California Communities United Institute
California Faculty Association
California Federation of Teachers
California Labor Federation, AFL-CIO
California Professional Firefighters
California Retired County Employees Association
California School Employees Association
California Teachers Association
California-Nevada Conference of Operating Engineers
Congress of California Seniors
Earned Assets Resource Network
East Hollywood Chamber of Commerce
Faculty Association of California Community Colleges
Greenlining Institute
JERICHO
Latinos for a Secure Retirement
Little Armenia Neighborhood Association
National Conference on Public Employee Retirement Systems
National Hispanic Council on Aging
Numerous individuals
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Peace Officers Research Association of California
Professional Engineers in California Government
SEIU United Long Term Care Workers
Service Employees International Union Local 721
Service Employees International Union Local 1000
Service Employees International Union Local 99
State Association of County Retirement Systems
TELACU
United Food and Commercial Workers Local 1428
United Teachers Los Angeles
Western Prelacy Armenian Schools
Workers United-SEIU Western States Regional Joint Board
Opposition
Allstate Insurance Company
American Council of Engineering Companies of California
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 Framing Contractor's Association
California Grocers Association
California Independent Grocers Association
California Manufacturers & Technology Association
California Retailers Association
California Small Business Association
Financial Planning Association
Financial Services Institute
Fullerton Chamber of Commerce
Garden Grove Chamber of Commerce
Hispanic Engineers Business Corporation
Howard Jarvis Taxpayers Association
ING
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
Personal Insurance Federation of California
Plumbing-Heating-Cooling Contractors Association of California
Principal Financial Group
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San Gabriel Valley Legislative Coalition of Chambers
Securities Industry and Financial Markets Association
Small Business California
State Farm
The Financial Services Roundtable
Western Electrical Contractors Association
Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916)
319-3957