Connecticut’s retirement plan mandate is not the answer

Despite what’s being touted by advocates, including AARP, as a solution to a growing retirement readiness problem, the state’s controversial retirement mandate is not the answer. It’s important that residents understand the financial risks.

The mandate requires businesses with five or more employees to enroll any full or part-time worker not eligible for an employer-sponsored plan into an IRA plan administered by the newly created Connecticut Retirement Security Authority.

Employers are responsible for the cost and burden of “selling” the plan on behalf of the state and then penalized for any delay in transmitting employee contributions.

In other words, employers who did not offer retirement plans in the workplace due to a lack of adequate resources will now be required to do so under penalty of law.

Employees will be automatically enrolled into the “voluntary” plan and see 3 percent of their pay deducted each pay period. The only way to opt out of the plan is in writing, every single year.

Advocates are hosting events to promote the state-mandated plan as the solution to Connecticut’s retirement savings crisis. Here are six truths about the plan that they won’t tell you:

The plan is built on the false narrative that people do not have access to retirement plans. While not every employer offers a retirement plan, there are hundreds of retirement and investment plans readily available online or at local banks.

The state’s retirement plans do not offer the tax benefits of private sector plans. Unlike most private sector plans, contributions to the state’s plan will be deducted from your pay after taxes.

Plan options will be limited. Instead of the best products and services from multiple vendors, the state plans to move forward with multiple plans from a single vendor, resulting in little choice for participants.

The cost of the plans may necessitate the state to automatically double the stated reduction in employee wages to fund the plan. While state law prohibits the authority from using taxpayer dollars to fund the plan’s start up costs, they may borrow up to $1 million from the state’s general fund to cover these costs. When contemplating how such a loan would be repaid, the board determined one option was doubling the mandatory enrollee contribution from 3 percent to 6 percent .

There is a question about the plan’s ability to remain solvent. The reason most people are unprepared for retirement is not due to lack of access to retirement plans, but because they can’t afford to or choose not to participate in a plan. The plan also allows will allow for penalty-free withdrawals at any time. This means the plan may never achieve its target goal of $1 billion in assets needed to be self-sustaining, putting all participants’ savings at risk.

Lastly, there is concern of the plan’s legality since Congress has rejected a ‘safe harbor’ rule that would have exempted the plan from protection under federal consumer law.

There is no question that many Connecticut residents are not saving enough for their retirement.

But in a time when our economy continues to lag the region and nation, the last thing we need is another mandate on small and mid-sized businesses.

Instead, policymakers should work with what already exists in the marketplace and help residents understand the value of saving for retirement, not force them to do it.