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Retirement Plan Laws: The Connecticut Retirement Security Program (CRSP) for Small Businesses

By Damian Davila

Following the actions of other State governments, including those of Illinois, California, and Oregon, the State of Connecticut enacted the Connecticut Retirement Security Programin 2016 to address the retirement savings challenge of workers in Connecticut. The State Comptroller has estimated that nearly 600,000 workers in Connecticut lack access to a workplace retirement plan. In this article, we’ll focus on what you can expect from Connecticut’s proposed retirement plan and how it compares to other small business retirement accounts, such as the commonly used 401(k). For a more general overview of other states and their retirement plan timelines: Small Business Owners Required to Offer Retirement Plans Under New State Laws

Connecticut Retirement Security Program: The stats and the basics

Created through Public Act 14-217 in July 2014, the Connecticut Retirement Security Board (CRSB) performed a two-year study on the feasibility of a state-sponsored retirement savings program for Connecticut workers. In January 1, 2016, the CRSB presented the results of its market feasibility study and concluded that a plan with a 6% default contribution rate and auto-enrollment would be financially feasible and expected to become self-sustaining between years three and five. The CRSB study suggested the use of traditional and Roth IRA accounts with one investment option aligned with the individual’s target retirement date (in simpler terms, a target-date fund). While critics of the program point out that any worker could open an IRA on their own at any time, the reality is that a plan with auto-enrollment and automatic paycheck deductions could benefit Connecticut workers for two main reasons. First, according to Connecticut-specific data from the Schwartz Center for Economic Policy Analysis at The New School, in 2010 only 59% of employers in the state offered a retirement plan, down from 66% in 2000. The Connecticut Retirement Security Program could bridge the estimated four out of ten workers without a workplace retirement account. Second, the 2017 Retirement Confidence Survey from the EBRI reported that approximately two out of every three of non-saving workers say they would be likely to save for retirement if automatic paycheck deductions with the option of changing or stopping them, at either 3% or 6% of salary, were used by their employer. By mandating employers with five or more employees to offer the plan, the State of Connecticut could boost retirement savings across the state.

How the Connecticut Retirement Security Program works

Under the Retirement Security Program, employers who, on October 1st of the preceding calendar year employ five or more employees in Connecticut and don’t offer a workplace retirement plan would have to automatically enroll employees in the state-sponsored plan. Within 30 days of hire, qualified employers will be required to provide each employee a participation disclosure describing the mechanics of the plan. From that date, employees will have up to 60 days to decide whether or not to opt out of the plan. Eligible employees can choose between a traditional IRA or Roth IRA account and those employees failing to make an election will receive a traditional IRA by default. In 2017, workers can contribute up to $5,500 ($6,500 if age 50 and over) to a traditional or Roth IRA. However, high-earning individuals choosing a Roth IRA may be subject to lower contribution limits. In 2017, here’s how much you can contribute to a Roth IRA:
Tax Filing Status Modified Adjusted Gross Income Contribution Limit
Single, head of household, or married filing separately and you don’t live with your spouse at any time during 2017 Under $118,000 Up to $5,500
$118,000 – $132,999 A reduced amount *
$133,000 and over Zero
Married filing separately and you live with your spouse at any time during 2017 Up to $10,000 A reduced amount *
$10,000 and over Zero
Married filing jointly or qualifying widow(er) Under $186,000 Up to $5,500
$186,000 – $195,999 A reduced amount *
Up to $196,000 Zero
* To figure out your reduced contribution limit, refer to worksheet on Publication 590-A, Contributions to IRAs. The employer is responsible for transferring the withheld contributions to the employee’s retirement account by no later than the fifteenth business day of the month following the month in which the contribution was withheld from the employee’s paycheck. Currently, all contributions will be invested in an age-appropriate target fund but the Connecticut Retirement Security Board is evaluating alternative investments. The current default rate of contribution is set at 6% of every paycheck, but employees have the option to adjust it. Employers aren’t required or permitted to make contributions. The Connecticut Retirement Security Authority (CRSA) hasn’t determined the annual expense ratio of the plan but this fee could range from 0.75% to 1.05% per year as currently scheduled with OregonSaves and Illinois Secure Choice, respectively. All fees are paid by plan participants (the employees, not the employers) and no taxpayer money is involved.

Is the Connecticut Retirement Security Program mandatory?

Yes, once implemented, this state-sponsored plan will be mandatory for all employers in the private sector who meet the following criteria:
  • Employs five or more employees who received at least $5,000 in wages during the previous year
  • Has been in business for at least one year
  • Has never and does not offer a qualified retirement plan, such as a 401(k)
There is a penalty for qualified employers failing to enroll and another one for those employers failing to remit contributions.
  • If a qualified employer fails to enroll an eligible employee, the employee or the labor commissioner on behalf the employee may bring a civil action to require the employer to enroll the employee in the plan and cover reasonable attorney’s fees as set by the court.
  • If a qualified employer fails to transfer employee contributions to the plan, the employer is punishable by imprisonment and fines depending on the amount withheld. For example, an employer keeping $2,000 becomes guilty of a class D felony, punishable by up to five years in jail and/or a fine from $2,000 to $5,000.
However, the plan assigns no fiduciary risk to employers and grants employers immunity with regard to investment returns, plan design, and retirement income paid to enrolled employees. As of April 2017, the CRSA hasn’t released a launch date of the plan. Until then, employers and all interested parties can submit their questions to the Connecticut Retirement Security Board’s former staffer, Genevieve Ballinger, at [email protected].

Eligibility of employees: Which employees qualify?

Covered employees are those employed by a qualified employer in Connecticut who:
  • Are of age 19 or over
  • Have been employed for at least 120 days
  • Provide services within Connecticut as established in Section 31-222 and not exempt from “employment” as established in Section 31-222(a)(5).
Employees working for an unqualified employer may participate in the plan if their employer chooses to enroll in the program with the the CRSA. All part-time, contract, and freelance workers may enroll on the Connecticut Retirement Security Program on their own as long as they meet the IRS guidelines. The main one to keep an eye is the modified adjusted gross income threshold for opening a Roth IRA in 2017:
Tax Filing Status Modified Adjusted Gross Income
Single, head of household, or married filing separately and you don’t live with your spouse at any time during 2017 Up to $133,000
Married filing separately and you live with your spouse at any time during 2017 Up to $10,000
Married filing jointly or qualifying widow(er) Up to $196,000
If a part-time, contract, or freelance worker were to choose a traditional IRA and not an Roth IRA, then these income limits wouldn’t apply.

What happens if your company already offers a 401(k)?

If your company already offers a 401(k) or other plans qualified under sections 401(a), 403(a), 403(b), 408(k), 408(p), or 457(b) of the Internal Revenue Code, then you don’t need to enroll your employees in the Connecticut Retirement Security Program. Still, you should expect to complete some kind of paperwork to notify the State of Connecticut’s Treasury that your business is already offering a qualified savings plan. Such a process could be similar to filing a Certificate of Exemption under Oregon’s state-sponsored retirement plan known as OregonSaves.

The financial downsides of the Connecticut Retirement Security Program

The CRSB was disbanded on July 1, 2016, shortly after the release of its feasibility study, and passed on the torch to the CRSA, which first met and convened on January 1, 2017. While there is a current implementation plan, it needs to address the following potential issues.

Striking a balance between default contribution rate and investment fee

As all other state-sponsored retirement plans, the one from Connecticut is looking to make the plan as self-sustaining as possible in the shortest amount of time. This means seeking a higher default contribution rate during auto-enrollment and a higher investment fee. In its feasibility study, the CRSB recommended a default contribution rate of 6% from employee paychecks. However, this recommendation is most likely not going to be followed. California, Illinois, and Oregon set their default contribution rates for their plans at 3%, 3% and 5%, respectively. Given that the number of estimated workers that could benefit from the Connecticut Retirement Security Program is closer to that of Oregon (one million) to that of Illinois (1.2 million), it’s more likely that the CRSA will have to charge at least a 0.75% annual expense ratio to plan holders. Why? Lawmakers fear introducing a law that would make its constituents feel the pinch. However, the actual data disproves these assumptions from lawmakers. A 2016 CRSB study has shown that participation contribution under different default contribution rates doesn’t vary as dramatically as lawmakers would expect. With a default 3% contribution rate, 84% of workers would participate in the plan. When that rate is increased anywhere from 6% to 10%, the percentage of participating workers would drop to 81% and 76%, respectively. Additionally, the average contribution rate of Vanguard 401(k) plan holders was 6.8% in 2015. In summary, Connecticut employers and employees looking to compare the state-sponsored plan against other alternatives should wait on the announcement of the default contribution rate and investment fee in order to accurately compare the plan against alternatives.

IRA accounts aren’t optimal for late retirement savers and high-income earners

The CRSA has made an effort in making both traditional and Roth IRAs available to plan holders because this would allow Connecticut workers with high incomes to be able to contribute to the plan up to $5,500 ($6,500 if age 50 or over) when choosing a traditional IRA. Still, this is be a subpar solution. Here’s why: a taxpayer that is single, head of household, or married filing separately with a modified adjusted gross income of $133,000 per year in 2017 would choose a traditional IRA because he or she is ineligible for a Roth IRA. Assuming the proposed 6% default contribution rate, he or she could contribute at least an estimated $7,980. This amount is well above the $5,500 contribution limit for a worker under age 50. Such an individual would benefit from saving for retirement with a 401(k) instead, which has a higher contribution limit of $18,500 ($24,500 if age 50 or over). The lower contribution ceiling of IRAs affects those savers setting up their retirement accounts closer to retirement age. While it’s true that it’s better to start late than never at all, it’s even better to set up an account that doesn’t restrict the amount that these late savers can contribute.

Target-date funds are underperforming

Most investors are dumping actively managed funds and shifting them to passively managed funds. Passively managed funds attracted almost $505 billion in 2016, while active funds saw $340 billion in withdrawals. In January 2017, Morningstar reported that U.S. investors had withdrawn their investments from actively managed funds for 33 consecutive months. Still, the CRSB recommended in its feasibility study that plan holders have access to an age-appropriate target-date fund as the default investment option. There’s mention that the CRSA may determine additional investment vehicles but other state-sponsored plans are choosing target-date funds (with the exception of California’s, which is choosing U.S. Treasury bonds) as default investment vehicles. On top of lower average returns, target-date funds have higher annual expense ratios. A review of more than 1,700 target-date funds found that the average expense ratio was 1.02% or $51 per $5,000. For example, the Blackrock LifePath 2050 Fund Class A currently has an expense ratio of 1.46% or $73 per $5,000. An investor would greatly benefit from choosing a lower-cost equity index fund. For example, the Vanguard 500 Index Fund Investor Shares has an expense ratio of 0.16% or 8% per $5,000. With Human Interest, you could gain access to the Admiral versions of Vanguard index funds with annual expense ratios as low as 0.05% or $2.5 per $5,000.

The bottom line: Evaluate all of your workplace retirement plan options

Whether you’re an employee or employer uncovered by a retirement plan in Connecticut, you still have time to research all of your options. More details will become available throughout 2017 and beyond. Keep informed by visiting http://www.osc.ct.gov/crsb/, send your questions to [email protected], and include Human Interest in your research. Here are some additional resources to help you evaluate your options: