'Cost-saving' retirement account plan actually costs state

Also doesn’t remove barrier for small businesses

(April 1, 2008) A “cost-saving” proposal to move state government into the retirement-plan business for companies of 100 or fewer employees could cost state taxpayers as much as $1 million in the first two years alone, and then $400,000 in subsequent years.

Proponents of SB-652, which was approved by the Commerce Committee this week, say it would cut retirement account fees in half for small businesses. In fact, however, the measure would create an additional financial burden on the state, and it ignores the biggest deterrent to small businesses offering these plans.

First, a study conducted in Maryland on a similar legislative measure found that adding more government bureaucracy to manage the new accounts would cost taxpayers there more than $600,000 in the first year and $400,000 in each of four following years. Retirement plan management is more complex than simply adding accounts to an existing pool — each has to be individually managed under strict federal regulations.

True barrier
The biggest barrier for employers wanting to establish 401(k) plans for their employees is the cost of employer contributions, not related administrative or investment costs. Any “economy of scale” the state can achieve will do nothing to help with the cost of these employer contributions. Instead, state government will be entering into competition with its businesses while doing nothing about the real cost barrier to participation.

There are a variety of products on the market now that are available to small businesses. The state should do more to educate consumers about the importance of retirement planning rather than create false hopes for people.

For more information, contact CBIA’s Jesmin Basanti at 860-244-1929 or jesmin.basanti@cbia.com.