Commerce Committee

JOINT FAVORABLE REPORT

Bill No.:

SB-652

Title:

AN ACT CONCERNING SMALL BUSINESS RETIREMENT PLANS.

Vote Date:

3/13/2008

Vote Action:

Joint Favorable Change of Reference to Appropriations

PH Date:

3/11/2008

File No.:

SPONSORS OF BILL:

Commerce Committee

Co-Sponsor: Senator Donald Williams, Jr., President Pro Tempore

REASONS FOR BILL:

This bill requires the comptroller to establish a tax-qualified defined contribution retirement program to provide retirement investment plans to self-employed individuals, small employers, and non-profit organizations.

The program this bill seeks to establish must seek (1) to minimize costs by helping small employers and individuals, (2) arrangements and investments through economies of scale, and (3) standardization and other measures.

In this bill, “small employers/businesses” are defined as those that employ no more than 100 employees

This bill allows the comptroller to (1) contract with a third-party administrator to manage the plans and (2) recover the costs of initiating, operating, and administering the program from the program's assets.

Currently about 75% of the small businesses in Connecticut do not offer retirement plan savings options. It is believed that one reason for this is that they cannot achieve the economies of scale that would make providing a 401(k) plan and other programs viable savings plans for their employees. This bill aims to develop a low cost option for small-businesses to provide retirement plans.

RESPONSE FROM ADMINISTRATION/AGENCY:

State Comptroller Nancy Wyman, supports this bill because she feels that “Connecticut has the opportunity to be a leader in using the resources of our state to offer small businesses and their employees an affordable way to save for retirement.” Nearly 75% of small businesses (small businesses being constituted by businesses with 100 or less employees) are not currently offering retirement plans. “Providing businesses with an affordable option to offer this very important benefit to their workers ensures a greater degree of financial security for retirees” and could help our local businesses attract and keep talented employees, while also boosting the state's economy. This bill would enact a plan which would be an independent extension of the voluntary retirement-savings programs available through the Comptroller to all state employees, which has been a very successful campaign so far – having the assets in the plans more than double in the past two years to a total of over $2 billion. The proposal in this bill would have no cost to the state taxpayers. She thinks this is another possible way in which the state of Connecticut can use its' resources to help small businesses thrive.

Senator Donald Williams, Jr., President Pro Tempore, supports this bill because it would “enable the Office of the State Comptroller to offer retirement plan options to small businesses employing fewer than 100 employees, employees of non-profit organizations, and self-employed individuals. If enacted, Connecticut would become the first and only state in the nation to offer affordable retirement savings option to the private sector.” There are currently about 75% of the small businesses who do not offer retirement plan savings options. It is believed that one reason for this is that they cannot achieve the economies of scale that would make providing a 401(k) plan and other programs viable savings plans for their employees. A savings of about 50% is estimated by the State Comptroller to be the savings achieved through this state-administered plan. “A 50 percent reduction in fees equates to four fewer working years to achieve the same retirement savings.” There would be very little cost to the state, and the cost would potentially be recouped in much the same way that 401(k) plans on the market are funded, through administrative fees.

Sen. Williams said that special interest groups would be testifying in opposition to this bill because they may think that it will hurt their businesses if Connecticut workers have these retirement savings options. This bill as written is designed with plans to target those individuals and families who are not currently participating in a plan. Therefore, Sen. Williams does not think this would hurt their business as it is designed to serve an underserved population, which he says needs and deserves affordable retirement options.

The benefits of this bill are seen by Sen. Williams to extend beyond enhanced retirement security to the people of our state. This bill could also give a significant advantage to Connecticut's small businesses in attracting and retaining skilled workers, “ultimately making Connecticut a more attractive place to live, work, and do business.”

NATURE AND SOURCES OF SUPPORT:

John Erlingheuser, Advocacy Director, AARP Connecticut, spoke in support of this bill on behalf of the more than 625,000 AARP members in Connecticut. Improving access, coverage and adequacy of pension and other retirement saving vehicles is a major priority for AARP, so they support this bill because it helps to do just that. Since AARP serves the aging population, which is growing rapidly due to the aging of the baby boomer population, planning for retirement is very important to them. They say only about 50% of the workforce has some kind of retirement coverage. Attempts have been made to expend coverage for private sector workers over the past 3 decades or more, but without much success. They think that “in light of an aging population, the disappearance of guaranteed pensions in the private sector, low or negative savings rates, and the drumbeat of negative news about the long-run solvency of the Social Security System, the time is right for something different.”

Although retirement plans of any kind are extremely beneficial to those who have them, this can be a cause of concern for state taxpayers who have no pension and view this as being taxed to help fund what they see as generous public and retiree benefits. This bill may help eliminate “pension envy” while still making great use of the resources the state can provide. Although the state would serve as an aggregator and facilitator for the private employers and their workers, this voluntary account system would truly be voluntary because it still would be essentially market-led, not government-run. The businesses are not mandated to participate in this voluntary accounts system.

There are many strong points to this bill that they see. One is that it is flexible. “Since the majority of middle-earners in the U.S. do not set aside as much as the maximum amount allowed for an IRA (currently $5,000; $6,000 for someone who is 50+ years old), a payroll deduction IRA would fill the bill quite nicely in launching Connecticut's citizens on a path to improved retirement income security.” The passage of this bill would also add to Connecticut's “bragging rights” with current and prospective employers and employees as an appealing feature. These voluntary accounts can be seen as part of the state's economic development initiatives, and also save the state money in the long run – if there is a lack of access to participate in retirement plans, the state would possibly have to “pick up the pieces for many individuals who become impoverished in their later years” without that extra support.

Expanding the already existing voluntary retirement-savings plans through the Comptroller can be done in “a very low-cost, low-risk, non-coercive way that employers find appealing” because in trying to provide retirement savings plans on their own, employers may face prohibitive fees to set up, operate, and monitor retirement accounts.” The cost for the state would be very minimal because after a modest cost for setting the system up initially, the operation would be able to sustain itself with fees from plan participants.

The opposition may object by saying this would take business away from them, but this is not a population they are currently serving, so there is no business for them to lose. In fact, this may create business for them in two ways. One is that in the future if these accounts take hold and workers want to roll them over when they change jobs, an opportunity for brokers and agents to pick up new business is created. Another way is that these brokers and agents can also “compete to be the organizations selected by the state to administer the program.” Opposition may also come from those with plans now in the public sector who may fear that these accounts could put their existing plans at risk. But this is not the case, and “AARP is committed to seeing that these traditional pension plans remain strong, and will advocate on their behalf.”

“In an era when the federal government seems unable or unwilling to take bold steps in the area of employee benefits, voluntary accounts represent an opportunity (…) for the states to take the lead on a vitally important national issue.”

NATURE AND SOURCES OF OPPOSITION:

Jesmin K. Basanti, Staff Attorney, Connecticut Business & Industry Association (CBIA), opposes this bill because they agree with what the Democrats for Economic Prosperity said in that, “the role of the government is to steer, not row.” CBIA feels that there is no need for them to get involved in the small business retirement plan market. Under ERISA (Employment Retirement Income Security Act of 1974), small businesses must currently meet federal requirements in order to meet specific rules for minimum contributions, which are usually around 3% of pay. The costs that this legislation refers to minimizing “cannot be eliminated. Therefore the state cannot make these programs any less expensive than the current employer-sponsored retirement arrangements.”

Insurance Association of Connecticut (IAC), opposes this bill because they feel there is no need for such a state-run program. The American Council of Life Insurers (ACLI) also registered their opposition to S.B. 652 through IAC's testimony. IAC does not believe that there will be any savings for participants in this state-run program because “a small business 401(k) plan would have very different, and labor intensive, administrative requirements than the state's own retirement plans. For the small business in a state-run 401(k) plan, federally mandated ERISA requirements would still apply in order to maintain the qualified status of the plan for that employer, while these ERISA requirements do not apply to state retirement systems. This bill would also put the state in direct competition with insurers, and have a competitive advantage over them. Having a competitive market for 401(k) plans works to the advantage of the public, while the investment options under S.B. 652 would be limited due to the plans being standardized.

Connecticut Bankers Association (CBA) opposes this bill because it represents a “very new and perhaps radical departure from the existing delivery of these financial services”. They feel that the present private market for these products operates very effectively and feels this bill would put the state in competition with the private market instead of just regulating them. Other concerns:

● “displacing private business with public employees ignores the tax loss ramifications and private sector employment loss”

● The budgeted amounts shown so far may not be adequate. “Federal pension laws are not simple and one shoe does not fit all.”

● They do not believe the state would be filling a void because they feel the initial low rates will attract the already served market, which may result in the destruction of an effective and competitive marketplace.

● There are many “backroom” processes, the costs of which appear to have been underestimated.

They request that this bill does not pass and that we continue “to allow retirement plans to be efficiently offered by the private sector.”

Michael Callahan, Pentec, Inc. on behalf of:

● American Society of Pension Professionals and Actuaries (ASPPA) ,

● Council of Independent 401(k) Recordkeepers (CIKR),

● and the Small Business Council of America (SBCA)

These groups oppose S.B. 652 because they believe it is based on two false assumptions. (1) “Small employers do not set up retirement plans because there are no low-cost options available in the marketplace”, and (2) “a state-sponsored 401(k) plan would reduce fees.”

They claim that low-cost retirement plans for small employers do exist in the market place right now. One example is SIMPLE IRA, which was created by Congress, and CBIA and CT Chamber have “developed 'pooled' retirement plans with lower fees for smaller businesses in the state.” They also claim that there would be “little, if any, cost savings under a state-sponsored 401(k) plan.” It would be much more expensive than the state's 403(b) or 457 plans for state employees. “It is critical to understand that each and every private business is required to adopt a plan, and perform required testing, as a single employer.”

“S.B. 652 is a well-intentioned, but very bad idea. The state's creation of a 401(k) plan for small businesses and tax exempt entities will only cause harm to the vary system it would be trying to help. The effort would be better spent on educating employers about existing options, or giving employers a tax credit to help make the contributions that are the real roadblock to establishing a plan.”

Andy Markowski, Connecticut State Director, National Federation of Independent Business (NFIB), opposes this bill because “it is unnecessary, untested, and gives the government significant control over a private sector market.” They think that retirement plans are not as high up on the list of concerns for small-business employers and workers as health care costs. “Workers would prefer legislation either reducing health care costs or creating tax credits and incentives for retirement plans.” They feel that low-cost plans already exist in the small-business industry, and this bill will not have much effect because 75% of small-businesses do not currently offer a plan. They've been able to decide for themselves up to now whether a retirement plan was feasible. They feel that retirement plans need to be encouraged and made more accessible to small-businesses, self-employed individuals, and non-profit organizations, but this is not the right way to do it.

Sean Thomas, President, Wells Thomas, LLC, opposes this bill because they fear the clients will suffer due to the loss of their ability to individually design the retirement plan that suits the need of the company as they do now, and also they feel like a large administrative burden will be created, which could be a financial burden passed on to plan participants, or Connecticut taxpayers. “Not only would it (S.B. 652) potentially take away the majority of our client base (as well as tax revenue to the state from our profession), but in doing so it would likely lessen the services these clients receive.”

Gerald Flowers, National Association of Insurance and Financial Advisors (NAIFA) Connecticut, opposes this bill because they would support a small employers tax credit as opposed to the program proposed in this bill.

David Beck, Manager of Administration Services, YHB Pension Services/PASI, LLC opposes this bill because they feel the two bigger obstacles to small-businesses providing retirement plans are the cost of administration and federal compliance rules which significantly limit the ability of the small-business owners to save for their own retirement.

● “If the state intends to a) break-even on providing these services, and b) provide adequate service to its clients, there will need to be substantial annual fees”, so this cost of administration would still continue to be an obstacle.

● “Although Federal law has provided us with SIMPLE's and Safe Harbor Plans, which are exempt from these rules” creating obstacles for small-businesses, “these Plans include mandatory generous employer contributions which many small businesses cannot afford”, so this will also continue to be an obstacle unless Federal legislation is passed to address those issues.

Kim Chamberlain, Managing Director and Counsel, Securities Industry and Financial Markets Association (SIFMA), thinks that a State sponsored voluntary accounts program is potentially viable, but they oppose this bill because they feel it will require significant long-term State expense. “The program may also be difficult to establish or market in the absence of federal legislative changes, such as a requirement that all employers have a pension plan, or offer a payroll deduction IRA account.” SIFMA “recommends that the program only proceed if the State retained direct control over investments and administrative arrangements, and received specific regulatory approval of that authority.”

Attorney Aaron Glick, Director of Business Development , Chamber Insurance Trust, opposes this bill because it eliminates the opportunity for the personalized plans that those who sell retirement plans help individual small businesses develop. “Those who sell retirement plans are educated professionals whereby if such proposed state administered plan was in place would eliminate their jobs.” They also argue that Connecticut is having trouble with administering its own retirement plans, so “why would a small business owner trust the state when the state has enough trouble administering its own plan.”

Jean Grace opposes this bill because she feels that the “State of Connecticut funds would be better spent educating employees or offering incentives to employers to use the programs currently available.”

Reported by: Laura Bartok

Date: 03/25/2008