Employers must prep for new public-retirement plan

PHOTO | Contributed CT Comptroller Kevin Lembo

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Q&A talks with Comptroller Kevin Lembo about the Connecticut Retirement Security program for private-sector workers.

Q: The legislature has passed and Gov. Dannel P. Malloy has signed a new law creating the Connecticut Retirement Security program, which will establish Roth individual retirement accounts (IRAs) for eligible private-sector employees. How will employers be impacted by this new program?

A: Employers who have five or more employees and who do not offer any retirement-savings option to their employees will be required to offer either the state program — or select a retirement-savings option of their choice from the private market to offer to all of their workers.

Those companies that select the state program over a private-market option will enroll all of their employees into the state program utilizing payroll deduction after a 120-day notice period. During the course of that 120-day period, employees will be given informational material and time to consider whether they wish to participate or not. Employees can choose to opt out during the notice period (and anytime thereafter) and — if they do opt out — the employer will not enroll them. The program, not the employer, will be responsible for creating the notice and enrollment materials and will distribute them to participating employers.

The employer's role in facilitating the program will be very minimal.

Q: What are the eligibility requirements for an employee to participate in the program?

A: Employers will have 120 days from the program's effective date or from any new employees' hire date to enroll their employees into the program. Therefore, those employees that work for less than 120 days will likely not be eligible to participate. There are no other eligibility requirements for employees to participate.

Q: Are there penalties for employers who fail to remit contributions, or who fail to enroll employees in the program?

A: If employers fail to remit contributions of an employee who is enrolled in the program after deducting the contributions from the employee's paycheck, then the existing wage-theft laws will apply along with their respective penalties as are already enforced by the Department of Labor in such cases.

If employers fail to enroll their employees in the program or to remit contributions of an employee enrolled in the program that have not been deducted from the employee's paycheck, then employees have a private right of action to sue the employer for denying their right to participate in the program. The allowable penalty under this scenario is prospective enrollment, remittance of contributions and attorney's fees.

The Connecticut Retirement Security Board also included in its recommendations that the implementing board should be able to waive any penalties if the employer made an honest mistake. The board also decided to not include any penalty fees for employers who fail to enroll their employees, as is included in other states' programs.

Q: What impact do you think this new program will have on employer-sponsored retirement benefits? Is there a chance employers will drop their retirement benefits and encourage employees to join the state program instead?

A: The Connecticut Retirement Security Board researched this very question by conducting an employer survey with both employers who do not already offer an employer-sponsored retirement plan and those who do. In the survey, they asked employers who currently do offer a plan whether or not they would drop their plan in order to participate in the state program. Only 1 percent of employers surveyed said they would drop their plan for the state program.

Q: How much money is being invested to start this program? How much will it cost the state annually to maintain it?

A: This program will be a self-sustaining program that does not use any state funds. The program's administrative costs will be paid for by a very small fee on participants' account balances as is traditionally done with IRAs and most retirement-savings vehicles. The large scale of the program will allow participants with small account balances to be charged much lower fees than they would be if they entered the private IRA marketplace with their small account on their own. Annually, it is estimated the program will cost approximately $500,000 in administrative costs, which is projected to amount to a 50 basis points (0.50 percent or half of one percent) annual fee on participants' account balances.

The startup costs are estimated to be between $500,000 and $1.5 million. The program assumes that the private-sector provider(s) chosen through a competitive bidding process to manage the program would take on the initial startup costs — not taxpayers — in exchange for a longer contract period. The statute allows for as long as a 10-year contract period in order to recoup startup costs, which would be done through the aforementioned 50 basis points (0.50 percent) administrative fee.

Q: Who will manage/sell the IRA funds?

A: The quasi-public agency created by the statute, the Connecticut Retirement Security Authority (Authority), will contract with a private-sector provider to manage the IRA funds. The statute provides that there be multiple qualified investment options offered by multiple vendors for participants to choose from. The default investment option for the IRA funds will be a target date fund, but the statute also allows the Authority to decide to offer other kinds of investment options as well.

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