Small Business at Greatest Risk from SB 1234
(August 1, 2012) A California Chamber of Commerce-opposed bill mandating private non-unionized employers that do not offer a retirement plan to enroll their employees in a government-created defined benefits plan will be heard in the Assembly Appropriations Committee on August 8.
SB 1234 (DeLeón and Steinberg) subjects employers to significant cost, fiduciary responsibilities and liability with no commensurate benefit to employees by requiring employers without a retirement plan to enroll their workers in the new “California Secure Choice Retirement Savings Program” or pay a penalty of $250 per employee.
Employee/Small Business Burden
In effect, the legislation could force low-wage workers to choose between being forced to set aside money for retirement and current pressing obligations, including paying the rent and high interest credit debt. The new risks mandated by SB 1234 (which applies to employers with as few as five workers) could be particularly harmful to small businesses that can’t afford the added liability, including the duty to properly educate employees about the retirement options available so the employees can make an informed decision.
Retirement plans for private sector employees are regulated by the federal Employee Retirement Income Security Act (ERISA), which subjects participants to significant responsibilities and requires every employer participating in the program to file annual reports and actuarial valuations.
According to a recent legal opinion, employers participating in the program would be subject to these ERISA requirements and would incur significant fiduciary responsibilities.
Citing U.S. Department of Labor advisory opinions, the legal opinion concludes that under SB 1234 “each employer sponsor of a plan that participates in the arrangement will be subject to ERISA’s fiduciary provisions.”
Among other responsibilities, California businesses would be personally liable to make good to the plan any losses resulting from any breach of the new fiduciary responsibilities.
Supporters of the bill contend the entire cost of the California Secure Choice Retirement Savings Program would be supported by the plan’s contributions and investment income.
Other analysts, however, say the supporters have significantly underestimated the costs and the potential shortfalls that will result if investment returns fall short of projections.
For example, the California Department of Finance opposes the legislation, predicting SB 1234 “could create a multibillion-dollar liability for the state if investment returns fail to cover the guaranteed rate of return and administrative overhead.”
Although SB 1234 caps administrative costs for the program at 1% of assets, Milliman, the international actuarial consulting firm, estimates administrative costs would exceed $556 million, or 11.3% of estimated annual contributions, if all 6.3 million eligible employees participate in the program.
By comparison, CalPERS manages retirement benefits for 1.6 million retirees, employees and their families. It has 2,300 employees and has spent an average of $426 million in administrative expenses over the last six years.
The CalChamber and a coalition of businesses, insurers and employer groups argue that the effort, liability and expense of SB 1234 are unnecessary given that California already has a highly competitive retirement savings market.
Anyone under age 70 with taxable income and a bank account can open an Individual Retirement Account or another retirement savings plan.
Nevertheless, SB 1234 seeks to create an expensive, risky new government program when the state budget can’t support existing services.
The legislation defers program specifics to an unaccountable commission, leaving unanswered key questions that should be thoroughly vetted and answered before the legislation is adopted.
Moreover, the new state program would compete for business with California financial services firms that directly employ 536,000 California workers.
The CalChamber is urging members to contact legislators and ask them to oppose creating the new retirement program in SB 1234. The mandate is at odds with efforts to make the state more business friendly.
In addition, the state already faces a huge unfunded pension liability for public sector workers. This is no time to create and assume liability for any new plan for private sector employees, much less one that guarantees a set rate of return on investment.
Staff Contact: Marc Burgat