It’s possible for the state of Connecticut to create a public retirement program for private-sector employees, according to a report released Monday by the Connecticut Retirement Security Board.
The market feasibility report conducted by the board found that a public retirement program would need approximately $1 billion in assets to become financially self-sustaining. If everyone eligible to enroll in the program did and contributed up to 6 percent of their earnings, then the program should be self-sustaining at the end of year two — and repay any estimated upfront costs and ongoing annual expenses between years three and five.
The report does not recommend guaranteeing a rate of return on the investments and it doesn’t recommend giving investment choice, but it recommends giving the board the ability to amend and evolve the investment program over time.
State Comptroller Kevin Lembo, who co-chaired the Connecticut Retirement Security Board with state Treasurer Denise Nappier, said residents would be auto-enrolled at 6 percent but could lower the amount they contribute to the fund.
Lembo said the investments would be like Individual Retirement Accounts, and the investment opportunities would be limited in order to keep costs down. He said it’s likely they would look at investing based on a target retirement date.
The program would likely serve, at a minimum, almost 600,000 Connecticut residents currently with no access to workplace-based retirement savings, according to the report.
Connecticut is only the second state to investigate what it would take in order to offer these plans more widely to the public. The first was California. However, California is still in the process of completing their study, and so Connecticut is the first state in the nation to complete a market feasibility study.
In development of the report, the board focused on increasing retirement security through a low-cost, pre-funded retirement savings programs that requires a minimal amount of financial sophistication. The proposed program would not be mandatory for businesses that already offer a 401K plan or other workplace retirement savings options to all their employees.
It also would not require that participating employers contribute to the program, only that they provide a payroll deduction mechanism for employees to contribute and employees would be automatically enrolled, but would have the option to decline participation.
Lembo said the board still needs to propose model legislation and if that legislation is successfully passed by the General Assembly then a successor-board would be named to help create the entity that would oversee the fund. Lembo said he would want the successor-board to be subject to the state’s Freedom of Information laws.
Eric Gjede, assistant counsel at the Connecticut Business & Industry Association, said he doesn’t doubt that businesses want low-cost retirement plans for their employees. However, he just doesn’t think the answer involves government.
These low-cost plans already exist in the private market, Gjede said, adding that the private industry has to do a better job of educating people about these retirement plans. But Gjede said getting the state involved in this is not the answer to the problem. He said there needs to be a greater effort by the private sector to educate consumers about some of these products.
Gjede also said there will be a cost to businesses to change their payroll deductions for their employees.
“It’s going to cost money for businesses to essentially have to sell a product for the state of Connecticut,” he added.
But John Erlingheuser, policy director for the AARP of Connecticut, said research shows that people are 15 times more likely to save for retirement if they do so through a payroll deduction.
He said his organization is pleased that “creating a plan at no cost to taxpayers is feasible and would address the retirement savings crisis in Connecticut.”
An AARP survey of 452 small business owners in Connecticut with fewer than 50 employees found two out of five don’t provide a retirement savings plan.
The most common reason cited for not offering a plan to their employees was cost. However, 64 percent of those who do not currently offer a retirement plan said they would use the public plan if it was offered.
Gjede said anyone who walks down to their local bank can open up a retirement plan. He said the private sector and the state just haven’t done a good job of teaching people the value of saving. However, he said he doesn’t believe a “state-sponsored retirement plan is the answer” to the problem.