State Run Retirement Plan
As part of the wave of state initiatives to make available, and in some cases, force smaller companies to offer retirement savings at work, Connecticut is the latest to pass a bill. The state will now impose a mandatory state run retirement plan. In a close vote in the Senate with a tie broken by the Lieutenant Governor, all that needs to be decided is which fund company will manage the money.
Other states like Maryland, California, Oregon, New Jersey and Massachusetts are on their way to enacting a state run retirement plan law similar to the Connecticut bill; with Illinois already passed and onto the implementation phase. The Connecticut bill requires that companies with five or more employees automatically deduct 3% of pay from workers making $5,000 or more after 120 days of employment which will go into a Roth IRA overseen by a state Agency with private solutions rejected by the Senate.
At a meeting with the Aspen Institute, Illinois officials were warned about pitfalls in implementing their initiative which requires companies with 25 or more employees to offer a workplace retirement plan – along with the state plan, which is not subject to ERISA, private options are available which would have to comply with the federal law. Academics like the University of Chicago’s Richard Thaler warned about not making the requirements for small employers too onerous eliminating unnecessary paperwork. An ADP representative cautioned that these smaller companies need hand holding. There have been concerns about resistance from employees about automatic deductions from their paycheck but research shows that not only is saving for retirement at work most effective, so is automatic enrollment.
Though no one is arguing that expanding retirement savings coverage of workers is a bad thing, there are concerns about implementation and unintended consequences. Companies that already offer a retirement plan and have workers in multiple states which have longer eligibility requirements may have to either change them or enroll workers in the state plan for a period of time. Though auto enrollment is great, 3% deferrals are not enough for people to save adequately – pegging the auto deferral rate too low without auto escalation can be dangerous and costly as low account balance can ruin the economics of plans that charge low asset based fees. Finally, based on their history of running their own retirement plans, do private employers want the states to run their retirement plans making choices like where the money is invested? More to come but it looks like the train has left the station – at least in Connecticut.
