Study Sets Structure for State-Run Retirement Program in Connecticut
The Nutmeg State has taken another step toward the creation of a state-run retirement program for private sector workers with the release of a lengthy report
detailing the potential elements of such a program.
In 2014, Connecticut enacted legislation
creating the Connecticut Retirement Security Board (CRSB), charging it with studying the feasibility of a state-run retirement program for private sector workers with a requirement to issue the results of that study to the governor and the legislature by Jan. 1, 2016.Financial Feasibility
The report concludes that a state-run retirement program is “financially feasible under a range of market scenarios and plan designs at a 6% default contribution rate.” The report says that the state-run program needs to accumulate approximately $1 billion in assets to become self-sustaining and estimates that, assuming that program participants are auto-enrolled with a 6% default contribution rate, the program would reach that point by the end of the second year of operation.
Applying those same assumptions, the report estimates that the program would be expected to repay upfront costs and cover ongoing expenses sometime after the third year but prior to the fifth year of operation. The report determines that a state-run retirement program becomes less financially viable at a 3% participant default contribution rate and that, while financially feasible, an annual guaranteed rate of return on investments was not desirable due to the cost of providing that assurance relative to the benefit that a guarantee would provide.
The CRSB recommends that the program “be made available to all employees, including part-time employees, at the Connecticut location of a business or non-profit organization that offers enrollment in the program, provided that the employee has worked at that entity for at least 120 days and provided that the employee is not eligible to participate in the employer’s pension, 401(k), or similar retirement plan.” The CRSB endorsed both traditional and Roth IRAs as a feasible and suitable program account structure for participants in the state-run program, but recommended that traditional IRAs be the default savings vehicle.
The CRSB recommended that the program auto-enroll participants at 6% of pay while giving participants the ability to opt-out of the program or change their level of contribution. The CRSB recommended that the state-run program have only one investment option aligned with the participant’s targeted retirement date, frowning upon allowing the participant to choose investments. But the CRSB did not recommend a guaranteed rate of return on that investment. The CRSB also recommended that 50% of a participant’s accumulated account balance in the program be required to be paid out as a lifetime income stream, with the remainder of the account balance defaulted into these types of payments unless the participant actively elects otherwise.Next Steps
Now that the CRSB has determined that a state-run retirement program is feasible (and having met the Jan. 1, 2016 for doing so), the 2014 statute requires the CRSB to develop and submit a comprehensive legislative proposal by April 1, 2016 for consideration by the Connecticut legislature. This deadline is no accident — the legislature’s 2016 session target adjournment date is May 4, 2016.
Given that the original legislation was sponsored by the Connecticut House Majority Leader and the Senate President with the support of Gov. Dannel Malloy (D), it seems likely that in a few short months Connecticut will become the second state (following Illinois) to adopt a state-run retirement program for the private sector.Andrew Remo is the American Retirement Association’s Director of Congressional Affairs.