🔒State-run 401(k) wrong approach to retirement crisis

Connecticut's Retirement Securities Board (CRSB) has made us the first state in the nation to complete a market feasibility report for a state-run retirement program. The report seeks to lay the legislative groundwork that could affect all but the smallest businesses in the state. But adoption of the legislation might actually be counter-intuitive to the goals it seeks to achieve, alienating the backbone of the state's employment market.

Further, the goal of the feasibility study was to reduce dependency on Medicaid. Yet there is no guarantee that when a participant retires, he or she will remain in Connecticut. At the same time, there is no guarantee that retirees will not move to Connecticut only to find out they need Medicaid assistance. Both of these arguments negate the effectiveness of the plan.

Admittedly, something needs to be done about saving for retirement. But believing that the answer lies in a state-run retirement program is like thinking you can drive across the country with only enough money to purchase a gallon of gas for the entire journey. A more effective plan would be to institute a private/public partnership consisting of a statewide retirement education campaign that would incentivize employers to participate in the financial education process.

What is wrong with the proposal?

First, the plan does not address the real concern. The last thing anyone wants is an employee having a false sense of security only because he or she is a plan participant. There is a high probability that the proposed plan, combined with Social Security, will be insufficient. Even a 30-year-old man or woman who begins saving at 6 percent, and plans for 80 percent income replacement at age 67 will likely see a depleted retirement account at age 75.

Second, the proposed mandate would require Connecticut businesses with as few as five employees to enact administrative functions to ensure their workers gain access to the state-run plan. This burden is potentially devastating for small- to mid-size companies.

Opponents believe there are additional and significant negative unintended consequences. A Connecticut Business & Industry Association survey of rankings by national institutions shows that Connecticut ranks anywhere from 36th to 46th in business competitiveness. The mandates proposed in the new legislation will do nothing but lower the state's standing.

Third, the plan requires Connecticut employers to provide enrollment assistance, payroll deductions and education. Business owners would be liable for adherence and administration, and assume liability for potential grievance processes.

The CRSB report includes recommendations for onerous new mandates despite employer concerns. The Center for Retirement Research at Boston College, which the CRSB hired to measure employer reaction, completed a survey using focus groups and phone questionnaires that showed “small employers in Connecticut agreed that their workers are not saving enough for retirement but had many questions and concerns about the state getting involved. Employers welcomed action if it involved compensation from the state to help offer a plan or cheaper/better retirement savings options for their workers.”

However, the state retirement program is merely an IRA sponsored by Connecticut with proposed legislation for employers to assist. Why not just address the heart of the matter and go straight to the education piece by creating a state-supported financial literacy program to help residents prepare for retirement while providing employer incentives?

The answer to the retirement-savings crisis is not limited to savings. Nearly 50 percent of workers nationally do not have $2,000 in savingsand many face financial difficulties. A true solution provides education addressing behavior modification, which includes saving and budgeting. Studies reveal that employees pay off debt, live within their means and begin saving for their retirement as a result of a program that focuses on behavior modification. Employers even benefit through soft-dollar savings.

The marketplace is not lacking an additional retirement vehicle. What it lacks is a public/private partnership for financial wellness. Although advocates of a state-mandated program argue that approximately 600,000 state residents do not have access to an employer-sponsored retirement plan, it is most important to note that all have access to the same type of retirement vehicle proposed in the legislation regardless of employer engagement.

The effects of implementing a financial planning wellness program begins with “today” while laying the foundation for “tomorrow.” Connecticut has the ability to change the face of retirement — with a statewide employee financial literacy program and incentives to employers who help facilitate the education that provides lasting, long-term benefits.

Karen Waltemath is the founder of Integrated Financial Planning and Benefits Resources. She can be reached at karenw@fpabr.com.

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