Retirement Plan Board Strikes Out, Keeps Swinging

In baseball, it’s three strikes and you’re out. But when it comes to exploring the idea of a state-run retirement savings plan, the three-strike rule doesn’t seem to apply.

Frustrated by a lack of legislative support during the 2014 legislative session for their proposal calling for a state-administered retirement plan for private sector workers, lawmakers settled for a compromise.

They approved a bill that created a board whose duty it was to study the feasibility of a state run retirement plan. 

If finding that such a plan was feasible, the board's second task was to create the framework for it so that the legislature could come back and enact it in 2016.  

Feasibility, according to the board’s charge, would mean several things.

The plan would require automatic participation by any employees in the state whose employers do not offer an employer-sponsored retirement plan. What’s more, the plan would have to be:

• Portable—able to move with employees from job to job
• Low-cost—low in costs and fees (and funded by employee contributions)
• Desirable—with an annually predetermined,  guaranteed rate of return 

Find a plan that can do all three, says the law, and then adapt it for Connecticut. 

Curve ball

But wait, said businesses. It’s unlikely the state would be able to implement and administer a plan more cost-effectively than the financial services companies and agents already transacting business within the state.

It’s not that people don’t have access to a good plan, said those experienced in the marketplace.

Even if your employer does not offer a retirement plan, you can still walk into a local bank and open an individual retirement account with as little as $50. The real issue is whether Connecticut residents have the desire and ability to save. 

Despite the business community's protests, the board proceeded with its feasibility study.

Three strikes

The board hired Mercer, a global leader in retirement and investment consulting, to identify retirement products able to meet the legislature’s requirements.

Mercer found only four options that met some of the state’s requirements but said it was impossible to identify a product that met them all. Why?

Portable: Most insurers can’t guarantee a rate of return if an employee is allowed to cash out or stop paying into the plan. Often this will occur as an employee moves from one employer to another.

Low-cost: Nothing was more cost-effective or lower-cost than what is already available in the private sector. The state plan's fees alone would likely negate any returns generated for plan participants. 

Desirable: The Center for Research at Boston College was hired by the Board to poll the Employee Enrollment Experience. According to their findings:

• Approximately 20% will opt out of the state-run plan no matter what it looks like
• If the plan's investment returns are expected to be meager, nearly one-third of eligible people will stay away

Mercer also repeatedly told lawmakers that “None of these plans address retirement readiness”—that is, an employee’s ability to make ends meet during retirement. 

The bottom line is that any employee participating in a plan that met all the state's requirements would lose money. Even if the state dropped some of the requirements for their plan, employees still wouldn't be retirement-ready at the end of their careers. 

They would have been much better off going it alone with an existing plan at their local bank.  

Still swinging

If the board’s first step was to determine whether a state-run plan that was portable, low-cost, and desirable was feasible—then the board struck out. 

Given that the objective was “to determine feasibility,” then the game should be over. It appears however, that for some reason the board remains at the plate swinging away.              

It’s possible that the idea is more about expanding the reach of state government than about helping people save for retirement.

For more information, contact CBIA’s Eric Gjede at 860.244.1931 | eric.gjede@cbia.com | @egjede