Employer-mandated pension program advances

By CMTA Staff

Capitol Update, June 22, 2012

Despite lingering questions regarding program feasibility, employer liability and the State’s financial responsibility, SB 1234 by Senator Kevin De Leon (D-Los Angeles) continues to move through the Legislature.  Having moved from the Senate to the Assembly with partisan opposition, it passed out of its first Assembly policy committee, Labor, on a five to two vote, and goes next to the Committee on Public Employees, Retirement and Social Security.

SB 1234 would create a state mandated retirement savings plan for private employees and guarantee a set rate of return on investment. It requires employers with five or more employees, who do not offer their own retirement savings program, to enroll their workers into this state-run program or be subject to a $250 penalty per employee. While businesses who currently offer a retirement plan, such as a 401(k) plan, would be exempt from this bill, a business that for any reason discontinues such a benefit would become subject to its provisions.

CMTA and others have expressed serious concerns with the employer responsibility and liability issues as well as the operational challenges raised by this bill.  The most serious and troublesome of those concerns is the potential exposure to ERISA, the Employee Retirement Income Security Act of 1974, which regulates private industry benefit plans, including pensions. If ERISA applies, which we believe it does, given a recent set of U.S. Department of Labor Advisory Opinions, each participating employer would bear the cost of compliance and administration and be subject to the fiduciary duties and liabilities imposed by ERISA.  For example, all ERISA plans must pay an annual premium to the Pension Benefit Guarantee Corporation (PBGC) for insurance in the event a plan terminates with insufficient assets.  The current rate for both single and multiple employer plans is $35 per participant.  Proponents of the bill estimate the program will cover seven million workers.  This means that the PBGC premiums alone could total $245 million per year.  So, either the State or the individual employers will have to pick up this cost.

Further, because of ERISA federal preemption and private right of action provisions, employers could be forced to defend themselves in federal court against claims that arise.

Despite the good intentions this bill seeks to achieve, SB 1234 is a major step in the wrong direction. The State is already facing a massive unfunded pension liability for its own public sector workers.  This is simply not the time to create and potentially assume liability for any new plan for private sector employees, especially one that guarantees a set rate of return that will require the State, the courts or businesses to fulfill the promise created.

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