Something’s Amiss with Retirement Savings Plan

A market feasibility study of a state-sponsored retirement savings plan skips at least two basic marketing issues—its actual need and likely multi-million-dollar cost to taxpayers—and something even more basic: Is this a core function of government?
This week, the Connecticut Retirement Security Advisory Board gave lawmakers findings of its study related to a proposed mandate that would require businesses (of five or more employees) to automatically enroll any of their employees who are ineligible for an employer-sponsored plan, and don’t opt out.
The study itself—the market feasibility of a mandatory program—was an exercise in irony.
And given Gov. Malloy’s call for state government to define and stick to its core services, it’s legitimate to question if this program is a core function.
Under the plan:

• Employers would have to sell the plan to employees on behalf of the state
• The new state-sponsored plan would become the default option for any employee not currently enrolled in, or not eligible for, a retirement plan

While the potential number of plan participants could be high, projections for the plan’s financial sustainability are still somewhat shaky.

The plan relies heavily on employees contributing the default rate of 6% of their wages in order to most quickly achieve the billion dollars in assets the state needs for the plan to be fully self-sufficient.
But employees can opt to contribute less to the program--which would delay its self-sufficiency.
Some workers may temporarily be able to contribute 6% of their wages to the plan, but faced with a financial hardship, they could be forced to dip into their assets (and potentially pay a high penalty for that luxury).
Another financial consideration: Startup costs are projected to hit taxpayers upwards of $2 million for additional state employees and operations.
The business community continues to wonder: If the plan is based on optimistic assumptions and new taxpayer costs and risks, why would we take a risk with taxpayer (and plan participants’) money to do this?
Employers have also been wondering, since the idea was introduced:

• Why would the state choose to compete against Connecticut businesses selling retirement plans – especially when these businesses employ tens of thousands of state residents?
• Who is financially on the hook if this plan fails? (Hint: taxpayers.)
• Why not avoid such an expensive risk at all by partnering with Connecticut’s knowledgeable private-sector professionals to solve the biggest retirement savings issue: Helping people, at a younger age, understand they need to save--then helping them choose an already available private-sector product?

Before any other steps are taken, it would be good to find answers to those questions.
For more information, contact CBIA’s Eric Gjede at 860.480.1784 | @egjede