HBA-TBM H.B. 2447 77(R) BILL ANALYSIS Office of House Bill AnalysisH.B. 2447 By: Isett Pensions & Investments 3/13/2001 Introduced BACKGROUND AND PURPOSE The vast majority of retirement plans offered in the private sector are defined contribution plans rather than defined benefit plans. In a defined contribution plan, the company typically contributes a given percentage of an employee's salary, often an amount equal to the percentage withheld from the employee's paycheck. The employee may then direct the money to one or more investment options chosen from a list of options provided by the company. Upon vesting, the money contributed by the employer belongs to the employee, and the employee is free to take the money when he or she leaves employment. A defined benefit plan does not allow an employee the freedom to direct the investment of retirement contributions or the right to receive contributions provided by the employer unless the employee retires or dies. House Bill 2447 provides a defined contribution retirement plan to members of the Teacher Retirement System of Texas. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that rulemaking authority is expressly delegated to the board of trustees of the Teacher Retirement System of Texas in SECTION 1 (Sections 826.002 and 826.012, Government Code) of this bill. ANALYSIS House Bill 2447 amends the Government Code to require the Teacher Retirement System of Texas (TRS) to establish and administer an optional defined contribution plan (plan) under which an eligible member of TRS is authorized to pay contributions for the purchase of investment products that belong wholly to the member regardless of termination of membership in TRS. The investment products purchased by a member are selected from a group of investment products chosen by the board of trustees of TRS (board) according to rules the board adopts. The rules must provide for a selection of vendors of a variety of investment products and TRS is required to select vendors every two years. A provider of investment products is exempt from payment of franchise or premium taxes on products issued under the plan (Sec. 826.002). The plan is open to members of TRS, except members who are participating in an optional retirement plan for faculty members of state-supported higher education institutions, and participation is an alternative to participation in any other retirement plan offered by TRS. A member participating in the plan who changes employment to another position covered by TRS continues to participate in the plan. A member who participates in the plan and is absent from service except by death or retirement is authorized to withdraw benefits attributable to contributions (Secs. 826.003-826.005). A member who participates in the plan is required to make contributions at the same rate as a member of TRS is required to make for current service, and requires the state and each employer to make contributions at the same rate as is made for contributing members of TRS. The bill requires the plan's participant and the participant's employer to execute an agreement regarding the plan (Sec. 826.010). The bill provides that benefits in the plan that are attributable to a member's contribution vest in a participant immediately and sets forth a schedule for the vesting of benefits that are attributable to the state. Benefits in the plan that are attributable to the state's contributions that are not vested in a participant who terminates participation are required to be used to offset the amount of state contributions. The benefits of a product purchased under the plan become available under the terms of the product but not before the member terminates membership in TRS or attains 70-1/2 years of age (Sec. 826.006). A member is prohibited from establishing service credit in another plan offered by TRS for the period the member was participating in the plan (Sec. 826.008). The bill sets forth provisions by which a participant in the plan may authorize the payment of investment advisory fees from the amount in the participant's custodial account or product (Sec. 826.009). TRS is authorized to establish a governmental excess benefit arrangement for the purpose of providing to participants in the plan any portion of the participant's benefits that would otherwise be payable under the terms of the plan except for limitations on the benefits imposed by the federal Internal Revenue Code of 1986 (Sec. 826.011). The board is authorized to adopt any rules necessary to administer these provisions (Sec. 826.012). TRS is required to offer participation in the plan beginning September 1, 2002 (SECTION 4). EFFECTIVE DATE On passage, or if the Act does not receive the necessary vote, the Act takes effect September 1, 2001.