Despite what’s being touted by advocates, including AARP, as a solution to a growing retirement readiness problem, the state’s controversial retirement mandate is not the answer. It’s important that residents understand the financial risks it will impart upon many Connecticut workers.
The Connecticut Business and Industry Association and many business community allies strongly oppose this new mandate, and have been warning businesses and residents alike of our concerns.
For example, the mandate requires businesses with five or more employees to enroll any full or part-time worker not eligible for an employer-sponsored plan into an IRA plan administered by the newly-created Connecticut Retirement Security Authority.
Employers are responsible for the cost and burden of “selling” the plan on behalf of the state and then penalized for any delay in transmitting employee contributions.
In other words, employers who did not offer retirement plans in the workplace due to a lack of employee interest or a lack of adequate resources needed to manage such plans will now be required to do so under penalty of law.
And employees will be automatically enrolled into the “voluntary” plan and see 3 percent of their pay deducted each pay period. The only way to opt out of the plan is in writing, every single year.
Advocates are hosting events to promote the state-mandated plan as the solution to Connecticut’s retirement savings crisis. Here are six truths about the plan that they won’t tell you:
- The plan is built on the false narrative that people do not have access to retirement plans. While not every employer offers a retirement plan, there are hundreds of retirement and investment plans readily available online or at local banks. Most of these plans allow you to set up automatic contributions to accommodate your circumstances.
- The state’s retirement plans do not offer the tax benefits of private sector plans. Unlike most private sector plans, contributions to the state’s plan will be deducted from your pay after taxes. The reason for this is simple: the state is compelling you to participate in a retirement plan, but doesn’t want to provide a tax benefit that reduces what you owe in income taxes.
- Plan options will be limited. Instead of the best products and services from multiple vendors, the state plans to move forward with multiple plans from a single vendor, resulting in little choice for participants.
- The cost of the plans may necessitate the state to automatically double the stated reduction in employee wages to fund the plan. While state law prohibits the authority from using taxpayer dollars to fund the plan’s start up costs, they may borrow up to $1 million from the state’s general fund to cover these costs. When contemplating how such a loan would be repaid, the board determined one option was doubling the mandatory enrollee contribution from 3 percent to 6 percent.
- There is a question about the plan’s ability to remain solvent. The reason most people are unprepared for retirement is not due to lack of access to retirement plans, but because they can’t afford to or choose not to participate in a plan. Given the plan will allow for penalty-free withdrawals at any time, participants can tap their savings for every emergency situation. This means the plan may never achieve its target goal of $1 billion in assets needed to be self-sustaining, putting all participants’ savings at risk.
- The plan may be illegal. When the General Assembly designed the CRSA, it was premised on a “safe harbor” rule proposed by the U.S. Department of Labor. The safe harbor would have exempted state run retirement plans from the Employee Retirement Income Security Act, a federal consumer protection law. Since then, Congress has rejected the proposed rule, questioning the legality of Connecticut’s mandate.
There is no question that many Connecticut residents are not saving enough for their retirement.
But in a time when our economy continues to lag the region and nation, the last thing we need is another mandate on small and mid-sized businesses.
Instead, policymakers should work with what already exists in the marketplace and help residents understand the value of saving for retirement, not force them to do it.
Eric Gjede is Vice President, Government Affairs, of the Connecticut Business and Industry Association.