LAST REVIEWED Sep 16 2021 13 MIN READ
By Damian Davila
The Connecticut Retirement Security Program was created in 2016 to address the retirement savings crisis.
In August 2021, CRSA launched a pilot program for MyCTSavings, but hasn’t released an official launch date.
But is MyCTSavings your best choice? Learn how a 401(k) plan may outperform the state-provided IRA option.
Following the actions of other states, including those of Illinois, California, and Oregon, the Connecticut Retirement Security Program (CRSP) was enacted in 2016 to address the retirement savings challenge of workers in the state. At the time, it was estimated that nearly 600,000 workers in the Constitution State lacked access to a workplace retirement plan.
In this article, we’ll focus on the current details of Connecticut’s retirement plan and how it compares to other small business retirement accounts, such as the commonly used 401(k). For an overview on which states have passed mandates and more, be sure to check out our guide on state-sponsored retirement programs.
Connecticut’s state-mandated retirement program: The legislation that got us here
Created through Public Act 14-217 in July 2014, the former Connecticut Retirement Security Board (CRSB) performed a two-year study on the feasibility of a state-sponsored retirement savings program. On 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).
Public Act No. 16-29, enacted in 2016, created the Connecticut Retirement Security Authority (CRSA) and disbanded CRSB. A quasi-public agency led by State Comptroller and State Treasurer, the CRSA is the entity responsible for implementing MyCTSavings, the most up-to-date iteration of the state-run retirement plan.
When will MyCTSavings be offered state-wide?
In August 2021, CRSA launched a pilot program for MyCTSavings, which is slated to begin in September of that year. CRSA seeks interested employers to partake in an exclusive pilot of the program, which will provide private-sector employees with retirement savings accounts if they currently lack access to one through their employer. CRSA will help volunteers register their business, upload payroll and employee information, and schedule a time in September to review the process. In October, companies will begin submitting employee payroll contributions.
As of August 2021, the CRSA hasn’t released an official launch date of the plan. However, after the MyCTSavings pilot is complete, the rollout of the full program across the state is slated to occur in early 2022. Additionally, it appears that rollout will occur in waves. The CRSA Design and Investment Committee adopted a motion on July 1, 2021 that would enroll larger firms in the first wave and smaller firms in the second. However, the committee neither established a timetable for implementation, nor defined “larger” and “smaller” firms.
Is the Connecticut state retirement program mandatory?
Yes. MyCTSavings will be mandatory for employers that don’t already provide a qualified retirement savings plan benefit such as a 401(k). Qualified employers are those that employ five or more employees who received at least $5,000 in wages during the previous year. However, it doesn’t have to be the state program.
Do qualifying businesses face legal action by not complying?
Yes. There will be 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 of 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.
How Connecticut’s state-sponsored retirement plan works
Under MyCTSavings, employers who employ five or more employees in Connecticut and don’t already offer a workplace retirement plan will have to automatically enroll employees in the state-sponsored plan. Within 30 days of hire, qualified employers will be required to provide each employee with 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 to contribute to a traditional IRA or Roth IRA account. Employees that don’t make an election will receive a traditional IRA by default.
Employers aren’t required or permitted to make contributions.
Default contribution rates are set at 3% of total pay, which employees can adjust at any time.
For 2021, 2020 and 2019, total contributions participants can make to both traditional and Roth IRAs can't be more than $6,000 ($7,000 if you're age 50 or older).
Currently, all contributions will currently be invested in an age-appropriate target-date fund (although the CRSA is evaluating alternative investments). The CRSA hasn’t determined annual expense ratios yet. However, fees could range between 0.75% to 1% per year, respectively, using Illinois Secure Choice and OregonSaves as models. In states such as Illinois and Oregon, all fees are paid by plan participants (employees, not employers) and no taxpayer money is involved.
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 CRSA. All part-time, contract and freelance workers may enroll in the Connecticut Retirement Security Program on their own as long as they meet the IRS guidelines. It’s important to refer to modified adjusted gross income thresholds for opening an IRA. For more information, refer to this IRS table.
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 MyCTSavings.
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. This process could be similar to filing a Certificate of Exemption under Oregon’s state-sponsored retirement plan known as OregonSaves.
Financial downsides of the Connecticut state retirement plan
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 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
Like 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 may not be followed. If other states are any indication, CRSA could charge at least a 0.75% annual expense ratio. While lawmakers may fear introducing a law that would make its constituents feel the pinch, a 2016 CRSB study found participation under different default contribution rates doesn’t vary dramatically. 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.
Ultimately, Connecticut employers looking to compare the state-sponsored plan against other alternatives may need to wait on the announcement of the default contribution rate and investment fee to accurately compare the plan against alternatives. However, employers may choose to offer their employees another qualified retirement plan, such as a 401(k), at any time.
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. While this would allow Connecticut workers with high incomes to contribute up to $6,000 ($7,000 if age 50 or over) when choosing a traditional IRA, it’s still a subpar solution.
A taxpayer that’s single, head of household, or married filing separately with a modified adjusted gross income of $140,000 per year in 2021 may choose a traditional IRA. Why? Because he or she is ineligible for a Roth IRA. Such an individual would benefit from saving for retirement with a 401(k) instead—which has a higher contribution limit of $19,500 ($26,000 if age 50 or over).
The lower contribution ceiling of IRAs affects 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 eligible employees can contribute.
Target-date funds are underperforming
The CRSB recommended in its feasibility study that plan holders have access to an age-appropriate target-date fund as the default investment option. While MyCTSavings may determine additional investment vehicles, many state-sponsored plans are choosing target-date funds as default investment vehicles.
In general, target-date funds have lower average returns and higher annual expense ratios. In fact, the average expense ratio was 0.51% or $51 on a $10,000 investment. Investors may greatly benefit from choosing lower-cost equity index funds instead. With Human Interest, savers gain access to the Admiral share class of Vanguard index funds with annual expense ratios as low as 0.04% or just $4 per year for every $10,000.
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 2021 and beyond. At Human Interest, we’re keeping our ears to the ground and will keep you updated as details of MyCTSavings unfold.
Here are some additional resources to help you evaluate your options:
Damian Davila is a Honolulu-based writer with an MBA from the University of Hawaii. He enjoys helping people save money and writes about retirement, taxes, debt, and more.