For private employees who don’t have workplace plans, Connecticut will now have a state-sponsored plan to save for retirement. Unfortunately, what could have been a useful program was severely weakened with changes required by Gov. Dannel Malloy in the face of fierce financial services industry lobbying.
This is what happened:
In 2014 labor, senior, and progressive organizations lobbied the legislature to set up a state-sponsored retirement savings program to address the growing retirement crisis, a component of which was that half of the Connecticut’s private labor force lacked employer-sponsored plans.
Over financial services industry opposition the bill narrowly passed. The first step mandated by the bill was to establish the Connecticut Retirement Security Board, on which I served. Its task was to study the issue and design a program that would then be proposed as a new legislative bill.
The CRSB met for a year and a half, commissioned outside studies, and then submitted the new legislative bill.
The core points of the proposed program were: mandating employers without retirement plans to participate in the new program; 3 percent contribution from employees with the right to opt out; no employer match; professional investing as opposed to leaving it up to employees to choose how to invest; and annuitization of half of the resulting balance upon retirement in order to produce life income.
There was near unanimity among board members, many of who came from careers in the financial services industry, on the need for professional investing. A major problem with 401(k) and other retirement savings programs is that most participants lack the knowledge, time or inclination to be skilled investors. This would be an especially acute problem with the disproportionately low-income target group of the program.
Many also do not want the aggravation of directing investments. One of the beauties of Social Security is that participants do not have to think and worry about it.
Opening up investment choice is a recipe for wrong choices, wrong choices that can severely undermine long-term accumulations of participants, thereby undermining retirement security.
Participants may be able to minimize wrong choices by hiring investment advisers, but it will be advice that comes at a substantial cost.
The more investment choices there are, the more administrative cost there will be to distribute thousands of small accounts among all of the investment products. Those costs will be taken out of participant savings.
The chief beneficiary of investment choice would be the financial services industry which administers the accounts. The more complex its activities, the more it can charge in fees.
For all of these and more reasons, the board concluded that investment choice was not in the interest of participants. That conclusion is consistent with what the early proponents of these programs, who were searching for a way for the states to address the retirement crisis when there was gridlock in Washington, envisioned.
Yet, Gov. Malloy rejected the board’s recommendation and required the change to the legislation: “The program will no longer have just one target date fund option, it now must offer qualified retirement investment choices and the choices must be from multiple vendors. If a participant does not choose the vendor/investment choice, they will be ‘rotationally assigned.'”
It is difficult to know whether the governor caved in to pressure from the financial services industry or personally believed in investment choice. Whatever his motive or reasoning, his action will cause participants to lose a significant portion of the gains of their savings, thereby undermining a chief purpose of the program.
James W. Russell, Professor Emeritus of sociology at Eastern Connecticut State University, was a member of the Connecticut Retirement Security Board. He is the author, most recently, of “Social Insecurity: 401(k)s and the Retirement Crisis“(Beacon Press).