Draft regulations for the new state-run retirement savings program, Secure Choice, leave out critical instructions to help employers understand their obligations, the California Chamber of Commerce explained during a recent workshop in Sacramento.
The regulatory process is intended to create accountability for the agency and transparency to the public.
The absence of those instructions will only lead to confusion and prevent employers from feeling engaged in the process if they don’t understand the rules, or believe they are being tricked, CalChamber Policy Advocate Marti Fisher said at the workshop.
Moreover, the lack of important specifics could be determined to be an underground regulation that is not enforceable.
Signed by Governor Edmund G. Brown Jr. in 2016, SB 1234 (de León; D-Los Angeles; Chapter 804), along with the original SB 1234 (de León; D-Los Angeles; Chapter 734) and SB 923 (de León; D-Los Angeles; Chapter 737) in 2012, creates a framework for the California Secure Choice Retirement Savings Investment Program.
The program is a state-run retirement savings plan for private employees that includes automatic enrollment with an opt-out provision for an estimated 6.3 million California workers whose employers do not currently offer an eligible retirement savings program. Private employers with five or more employees will be required to automatically enroll their employees into and make payroll deductions for their Secure Choice retirement accounts, unless the employee opts out.
It is anticipated that the program will begin enrollment at large employers in late 2018, followed in subsequent years with enrollment at smaller employers.
ERISA and Enrollment Process
The employer community has been outspoken about the liability that the Secure Choice program could create under the federal Employee Retirement Income Security Act of 1974 (ERISA) for those employers that the state mandates to participate. It is imperative that the employer have no involvement with the Secure Choice program other than minor administrative functions in order to limit liability and administrative burdens.
Therefore, the success of the program for employers depends on the third party administrator (TPA) exercising a strong intermediary role between the employer and employee to ensure extremely limited interaction with the employee that could be construed as or evolve into an employer’s endorsement of the program.
The CalChamber and a coalition of employer groups are encouraging the Secure Choice Retirement Savings Investment Board and staff to be mindful that given the nature of the employment relationship, employees will want to seek out their employers for clarification and instruction regarding the employees’ decision to participate in this program. It is essential that systemic mechanisms are in place to redirect employees to the TPA to handle their questions and concerns, and not the employer.
Information Packets and Disclosures
The coalition continues to object to using the acknowledgment of receipt of the employee disclosure as a consent form for enrollment into the plan, which is inconsistent with the legislative intent of the program. As employers advocated for and provided structure to the disclosure, they asserted that the function of the form is to inform employees as a consumer protection function and to protect employers.
As a separate function, the disclosure is part of the employee information packet that contains an opt-out form should the employee choose not to participate. Providing the disclosure is intended to protect the employer and ensure the employees are fully informed about the program they have been enrolled in and to make an informed decision regarding continued participation. The enrollment process includes the employee’s acknowledgment of having received the disclosure documents and information about the program separate from the automatic enrollment. The acknowledgment is simply part of the administrative function, which the coalition asserts would best be performed by the TPA. The employee acknowledgment was not envisioned to serve as an opt-in or as making enrollment contingent upon it.
Lastly, regarding the disclosures related to employer liability, responsibility and advice restrictions, the CalChamber and coalition request the board and staff to involve and consult with them in developing and designing the document (that is, font size, color and wording) to ensure employees are properly and adequately given notice that this is a government-run retirement savings program.
The draft regulations are not specific about some elements of the process, such as how forms are handled, who provides what to whom, and specifically how enrollment occurs. The coalition continues to advocate for a process that limits the employer’s function, shifts primary communication and operations with employees to the TPA and is honest with employers and employees.
A number of provisions of the statute are not clarified in the regulations, but should be to avoid being developed as underground regulations, according to the CalChamber and coalition:
- Identifying who tracks contribution limits, who notifies the employee if they have reached it or are close to the limit, and what happens to overpayments beyond the limit.
- Process for employees to take their money out, either in its entirety or partial withdrawal of funds. Is a hardship required to make a withdrawal? What are the rules surrounding these functions?
- What constitutes a hardship? The number of times employees will be allowed to invoke a hardship situation? Is there a cap for a hardship withdrawal, and if so, what is the amount?
- What is the employee opt-out process; what are timeframes; how long after employees provide notification is their money returned?
- If there is a dispute between employee and employer, between employee and TPA, or between employer and TPA, what is the dispute resolution process?
- What happens when an employer drops below 5 employees?
The coalition believes that most, if not all, of these functions should be handled by the TPA and should be specified in the request for proposal (RFP) and in the regulations. As written, without the specific processes, the development of policy to address these items without formal regulation is likely underground regulation and not enforceable.
The coalition also raised concerns and questions about the definition of an employer eligible to participate in the program; details about the open enrollment period and handling employees who opt out of the program; voluntary enrollment prior to the program start; the process and requirements for a pilot program; deleting an option for employers to self-certify themselves for exemption from the program; and whether a traditional IRA or a Roth IRA should be the default investment choice.
The Secure Choice Board is scheduled to meet on December 18. Staff will brief the board and discuss public input regarding the proposed regulation draft, and seek further direction from the board.