Title 2. Administration
Division 1. Administrative Personnel
Chapter 3. Department of Human Resources
Subchapter 1. General Civil Service Rules
Article 27. 457 Deferred Compensation Plan
Section 599.942 Investments
DEPARTMENT OF HUMAN RESOURCES INITIAL STATEMENT OF REASONS
I. Purpose, Rationale, and Necessity for the Proposed Regulatory Changes
The proposed amendment to section 599.942 would broaden the scope of a regulation enforced by the Department of Human Resources (CalHR) to align with the applicable Government Code section. Until 2019, Savings Plus was statutorily required to offer specific investment options, including annuity products. Senate Bill 1504 (Chapter 903, Statutes of 2018), amending the requirement and granted Savings Plus “exclusive authority to determine the investment products provided in the core portfolio, specifying “a broad range of investment options" as well as a brokerage option be offered (Gov. Code, section 19993.05, subd. (b).) This section is now known as the Freedom of Financial Choice Act. Savings Plus' regulation section 599.942 reflects the outdated statutory requirements and must be amended to reflect current statute.
By providing the language “at least three investment funds", the plan maintains a minimum fiduciary responsibility in the spirit of investment options under Federal Labor Reg. Section 29 CFR 2550.404c-1 - ERISA section 404(c) plans. The three investment options should offer distinct risk-to-return profiles, allowing participants to decide how they want to allocate their account assets among these options.
Adding the language to offer a Self-Directed Brokerage Account (SDBA) provides the participants additional flexibility and investment options beyond the plan's core investment menu. The SDBA option provides the participant full control of their retirement.
The current regulatory language to provide a savings plan is a generalized term referring to the Savings Plus retirement program. Because the term savings plan is not specifically referencing an investment offering and the program is guided by the California Government Code 19993 and 19999.5, the reference should be removed.
The California Government Codes 19815.2 and 19815.6 were removed because they were incorrectly listed and not relevant to Section 599.942 Investments. California Government Code 19815.2 was created as a result of the reorganization of state departments, agencies, and boards, aimed at better serving the human resources and personnel needs of the state. California Government Code 19815.6 provides guidance on the representation of departments in legal matters, charging for the costs of legal services, arbitration, and negotiating memoranda of understandings.
The current regulatory language to offer two types of annuities provides a host of challenges to the structure of the Savings Plus Program. Annuities are not compatible with the nature of the program because they require participants to have a long-term relationship with an individual annuity provider over the course of the annuity payout, which can provide lifetime payments. Typically, Savings Plus contracts last only five to seven years based on the state's competitive bidding process which can be at odds with the participant's long-term relationship with the annuity provider. Also, the limitation of portability can prevent the program from effectively providing annuity products. The potential inability to transfer a participant's annuity from one record keeper to another may impact the participant's guaranteed minimum withdrawal benefits. Additionally, annuities have relatively high fees and costs over other available investment options and thus present a conflict with the program's fiduciary role to minimize costs.
The current language requiring one mutual fund provider is limited and antiquated since there are other investment vehicles suitable for the Savings Plus Program such as Collective Investment Trusts (CITs) and Single Managed Accounts (SMAs). By allowing Savings Plus to contract with investment managers in different investment vehicles, the program can source for the most prudent available investment options for the participant. Mutual funds can be a costlier option for Savings Plus when contracting with investment managers while providing no additional benefit. Thus, there is no reason why Savings Plus should be limited to only mutual funds in the program by its regulations.
II. Documents Being Relied Upon
401k Plan Documents dated January 1, 2020: Section 5 - Investment of 401k Contributions Subsection 5.1 Investment Alternatives (Page 23): References language to offer at least three investment funds, each of which is diversified and has materially different risk and return characteristics. The proposed updates to the text of regulation will harmonize the language to the Savings Plus Plan Documents.
457b Plan Documents dated January 1, 2020: Section 5 - Investment of Contributions Subsection 5.1 Investment Alternatives (Page 44): References language to offer at least three investment funds, each of which is diversified and has materially different risk and return characteristics. The proposed updates to the text of regulation will harmonize the language to the Savings Plus Plan Documents.
Investment Policy Statement dated January 1, 2020: Investment Structure (Page 5-6): Provides a breakdown and investment structure of the program. The proposed updates to the text of regulation will reflect closer to the stated investment structure of the Investment Policy Statement.
III. Technical, Theoretical, and/or Empirical Study, Reports, or Documents
This is a modification of a regulation to broaden the scope of a regulation enforced by the Department of Human Resources (CalHR) Savings Plus Program (Savings Plus) to align with the applicable Government Code section. The proposed regulation will remove the requirement to offer certain specified investment options, will align regulatory language with the amended Government Code section 19993.05 and existing Savings Plus Plan Document language, and allow Savings Plus the flexibility to offer the investment options that are in the best interest of participants.
IV. Economic Impact Assessment/Analysis
Purpose
The proposed regulation will remove the requirement to offer certain specified investment options, will align regulatory language with the amended Government Code section 19993.05 and existing Plan Document language, and allow Savings Plus the flexibility to offer the investment options that are in the best interest of participants.
Creation or Elimination of Jobs Within the State of California
The regulation is an internal governmental effort to harmonize the regulation with Savings Plus Plan Documents and Government Code section 19993.05. It does not extend to any program that affects the general public. Therefore, the proposed amended regulations will not affect the creation or elimination of jobs within the State of California.
The Creation of New Business or the Elimination of Existing Businesses Within the State of California
The regulation is an internal governmental effort to harmonize the regulation with Savings Plus Plan Documents and Government Code section 19993.05. It does not extend to any program that affects the general public. Therefore, the proposed amended regulations will not affect the creation or elimination of new business within the State of California.
The Expansion of Businesses Currently Doing Business Within the State of California
The regulation is an internal governmental effort to harmonize the regulation with Savings Plus Plan Documents and Government Code section 19993.05. It does not extend to any program that affects the general public. Therefore, the proposed amended regulations will not affect the expansion of new business within the State of California.
Benefits of the Regulations to the Health and Welfare of California Residents, Worker Safety, and the State's Environment
The regulation is an internal governmental effort to harmonize the regulation with Savings Plus Plan Documents and Government Code section 19993.05. It does not extend to any program that affects the general public. Therefore, the proposed amended regulations will not affect the expansion of new business within the State of California.
V. Evidence Supporting Finding of No Significant Statewide Adverse Economic Impact Directly Affecting Business
CalHR has found no evidence that the amended regulation would impose a significant statewide adverse economic impact affecting business.
VI. Reason alternatives to the Regulation and the Agency's Reasons for Rejecting those Alternatives
The first alternative is to leave the regulations unmodified. This alternative does not resolve the identified problem and would create a conflict. Savings Plus could be expected to offer annuity products, which have been deemed incompatible with the Savings Plus Plan's fiduciary obligations. Additionally, Savings Plus has not received bids on recent request for proposal for annuity products. Therefore, left unmodified, the Savings Plus Program could be deemed out of compliance with regulations.
The second alternative is to amend the regulations to allow Savings Plus discretion over the type and number of investment options offered by the program. This alternative would not be compliant with Government Code section 19993.05, which requires of “a broad range of investment options" because it could lead to offering as few as one investment option for plan participants.
