The Labor Committee Proposes A State Takeover of Private Sector 401k Plans

March 11, 2016

At a time when the state cannot take over its own pension?

By Senator Toni Boucher

The Labor Committee recently proposed that the state choose one company to offer IRA plans to those who don’t yet have one. HB 5591 would cause the state to compete directly with our retirement investment industry. This proposal would worsen Connecticut’s already hostile business environment. It’s time to stop this, now.

This bill is an unworkable solution to an urgent question: how do we encourage private sector workers to save for retirement? HB 5591 is just another costly mandate on Connecticut’s struggling businesses as well as a tax on employee wages. The bill mandates a single, state run IRA for private sector workers and creates a new bureaucracy with which employers must contend. Firms with more than 5 employees would be required to automatically enroll their employees, unless they opt-out.

This bill poses a considerable risk to employers, employees and to the state as a whole. Even the Connecticut State Retirement Board acknowledges the plan’s dubious financial sustainability. The plan requires an employee contribution of 6% without their affirmative consent, a practice that the majority party would condemn if it were initiated by a private financial firm, yet which is necessary for the retirement fund to remain solvent. This is at a time when Connecticut is unable to manage its own pension fund, which is funded at only 42%, when the national standard is 85%.

Enrolled employees would have no consumer choice, no control over how their money is invested, or the level of risk they assume. Since the legislation’s target population likely lives paycheck to paycheck, the loss of 6% of their income will make it more difficult for them to meet necessary expenses, a hardship that they will undoubtedly take to their employers. Finally, HB 5591 would grant a government authorized monopoly to a large financial institution, which would control an estimated $1 billion in assets, and the retirement savings of approximately 300,000 Connecticut residents.

This plan could effectively take over Connecticut’s entire planning and investment industry, supplanting a large and vital segment of our private sector. Having lost GE and other companies due to our oppressive tax and regulatory environment, the state should find ways to bolster its remaining successful industries. Retirement planning is one area in which there is an abundance of top notch providers. In order to preserve this business sector and provide effectively for future retirees, a better solution is needed.

The alternative we are proposing is based on a recently enacted Washington state bill. That bill establishes a small-business retirement marketplace within the state Department of Commerce. The marketplace’s goal will be to connect eligible employers with a wide variety of low cost, low-burden retirement savings plans offered by private vendors, and to educate small employers on their availability. Participation in the marketplace is completely voluntary both for employers and employees, but only those who are self-employed, sole proprietors or employers with fewer than one hundred employees may participate. Since the state would not provide the plans directly, it assumes no risk. Rather, the state will work with a private firm to develop the marketplace and establish protocols for selecting appropriate vendors.

This more balanced approach would create a one stop shopping place in which employers could quickly identify and enroll in financially prudent, qualified private plans, vastly lowering their administrative costs and the risks associated with investigating and choosing plans on their own. It received bipartisan approval and accolades from AARP, the Washington Bankers Association, the American Council of Life Insurers, and the Securities Industry and Financial Markets Association (SIFMA). SIFMA is the voice of the U.S. securities industry, whose 889,000 employees manage more than $62 trillion in assets for individual and institutional clients, including mutual funds and retirement plans.

By emulating this model, Connecticut could address the desire for more private sector workers to build financial security for themselves in a way that supports the private sector. The state should strive to assist private sector businesses instead of putting them at further risk for closure and to promote better informed and more proactive retirement savings. By acting as a clearinghouse for private retirement plans, rather than a direct competitor, the state could satisfy these goals in an arrangement that benefits everyone.