Yesterday the board of the California Public Employees’ Retirement System (CalPERS) decided to take a neutral stand on AB 2940, a bill authored by Assemblyman Kevin de Leon, D-Los Angeles, that would make California the first state in the nation to open its public retirement plan to workers in the private sector. The bill is aimed at the 6 million employees in California who aren’t offered a pension or retirement savings plan at work (see Bill Would Open CalPERS to Private Sector Workers ).

A recommendation to the Benefits and Program Administration Committee noted that AB 2940 would allow CalPERS to administer the Program through various structures that “…could limit its direct involvement in the management and fiduciary decisions that employers and qualified retirement plan providers generally make.” Further that “most of the bill’s requirements can be met through contracts with private-sector service providers, with management and oversight provided by CalPERS’ professional staff.” The analysis presented said that, “In effect, AB 2940 would allow the Board to determine CalPERS’ level of involvement in the operations of the Program, from developing and administering the Program completely in-house, to contracting-out all these functions to a third party, or a combination of the two approaches.”

Cost Considerations

The report to the board said that CalPERS’ costs for developing, administering, and marketing the program contemplated under AB 2940 could be divided into two phases: (1) initial development and start-up costs; and (2) ongoing administration or operating costs. According to the report, “The estimated start-up costs would be approximately $1.74 million for 13.2 PYs over an implementation period of approximately 18 to 30 months,” including approximately $500,000 in one-time costs associated with securing the services of outside tax and securities counsel to, among other things, assist CalPERS in obtaining the necessary federal regulatory approvals.

Once the program was operational, CalPERS’ ongoing administrative costs would range from $806,000 to $1.46 million annually, for 7.7 to 15.4 PYs, according to the report. The report also noted that continuing annual appropriations may be required for an indefinite period pending the build-up of assets sufficient to generate fee revenues off-setting CalPERS’ annual operational costs.

The full analysis is online HERE .

The presentation to CalPERS' Benefits and Program Administration Committee contained the following analysis of various other retirement savings proposals similar to AB 2940 that have recently been introduced or considered in a number of other states:

- The Legislature recently considered and rejected Senate Bill 728, which would have established the Maryland Voluntary Employee Accounts Program (MVEAP) administered by the Maryland Teachers and State Employees Supplemental Retirement Plans. Authorized plan structures under the MVEAP would have included 401(a) plans, including 401(k) plans, as well as trusts or savings incentive match plans under 408(p) of the Code. Instead, and at the Legislature's instruction, the Maryland Supplemental Retirement Plans recently conducted a study of Voluntary Employee Accounts to examine cost efficiencies, potential for state liability, and organization and administration requirement with regard to a state-sponsored program.

The study concluded that each participating businesses would have to routinely and regularly sign and return documents to a central administrator, provide annual reconciliation of contribution history, and follow instructions on distribution and collection of miscellaneous employee communication materials. It estimated that the MVEAP would require a subsidy of between $300,000 and $500,000 a year for at least five to seven years. Estimated costs included: design and drafting of special plan documents that describe the structure of the accounts, specific control mechanisms, and specific employer responsibilities; draft, submit and obtain rulings from the IRS and Department of Labor that approve plan documents with an estimated duration of 12 to 18 months.

- The Legislature has considered five universal retirement savings proposals since 2003. Last year, it appropriated money for the Washington Department of Retirement Systems (DRS) to produce a report scheduled for release this December, which studies the various legal issues and obstacles that must be addressed in order to implement such a plan. The current legislative vehicle is House Bill 2044, which would create the Washington Voluntary Accounts Program (WVAP) to offer employees a vehicle for saving and private employers a method for offering benefits. The bill designates the State Treasurer as the custodian of the WVAP account, and allows the DRS to implement and operate the WVAP either in-house or through an external third party contract. It also makes implementation and operation contingent on funding and allows the DRS to freeze or reduce enrollments and establish a waiting list if continued enrollment would cause expenditures to exceed revenues.

- HB 70 expands participation in 457 and 403(b) deferred compensation plans the State offers to its own employees to nonprofit corporations or other employers authorized by the IRC to participate in such DC programs.

- SB 24 would allow small business employees to participate in a newly established 401(a) pension plan administered by the Michigan State Department of Management and Budget.

Connecticut - SB 652 is a one paragraph measure that requires the State Controller to establish a tax-qualified defined contribution retirement program to provide retirement investment plans to self-employed individuals, small employers with no more than 100 employees, and non-profit organizations. The Controller is authorized to contract with a third-party administrator to manage the plans, and recover implementation and operating costs from plan assets.

- SB 652 is a one paragraph measure that requires the State Controller to establish a tax-qualified defined contribution retirement program to provide retirement investment plans to self-employed individuals, small employers with no more than 100 employees, and non-profit organizations. The Controller is authorized to contract with a third-party administrator to manage the plans, and recover implementation and operating costs from plan assets.