CalSTRS Seeks Authority to Administer Deferred Compensation Plans
Assembly Member Mullins (D-S. San Francisco) has introduced AB 2462, which would provide the California State Teachers’ Retirement System (CalSTRS) the statutory authority to supply, or contract to supply, fiduciary, recordkeeping, and administrative services for employer-sponsored deferred compensation plans to K-12 schools, community college districts, and county offices of education that elect to contract with CalSTRS to provide those services.
According to CalSTRS, the Internal Revenue Service is expected to approve proposed regulations that would impose additional recordkeeping requirements and fiduciary responsibilities on educational and nonprofit employers that make 403(b) deferred compensation plans available to their employees. These proposed requirements would be similar to those imposed upon employers who offer 401(k) and 457(b) deferred compensation plans to their employees.
CalSTRS staff members indicate that it is their intent for AB 2462 to authorize, but not require, CalSTRS to supply, or contract to supply (through another vendor), common remitter services and IRS 403(b) compliance services to those educational agencies that elect to have CalSTRS provide those services. CalSTRS states that some employers have asked them to consider establishing and providing these services on a contract basis, which would require changes to the Teachers’ Retirement Law. Further, school employers are not legally responsible for supervising how an employee’s 403(b) investments are handled, with the vast majority doing little beyond administering the payroll deductions.
As well intentioned as AB 2462 may be, there are some concerns being expressed. Opponents are concerned that undertaking the responsibility as a third party administrator for 403(b) investments goes beyond CalSTRS’ intended purpose and that the system should be focused on the management and operation of the basic pension plan. Also, the mechanism provided in the bill to fund initial development costs would entail the redirection of a portion of employer contributions that would have been paid to the Defined Benefit Program. Although these redirected funds will be paid back to the Defined Benefit Program at an unidentified time in the future, it may not be appropriate to redirect these funds at this time when the system is experiencing financial difficulties. In addition, opponents believe that AB 2462 is premature, at the very least, due to the fact that the IRS regulations have not been finalized.
When the bill was heard in the Assembly Committee on Public Employees, Retirement and Social Security, some committee members expressed concerns with the legislation. However, the bill was approved by the committee and is now scheduled to be heard in the Assembly Appropriations Committee.
