PA 16-29—sHB 5591

Labor and Public Employees Committee

AN ACT CREATING THE CONNECTICUT RETIREMENT SECURITY PROGRAM

SUMMARY: This act creates the Connecticut Retirement Security Authority (“authority”) to establish a retirement program with Roth individual retirement accounts (IRAs) for eligible private-sector employees, who will be automatically enrolled in the program unless they opt out. The act establishes the authority as a quasi-public agency administered by a nine-member board of directors. (PA 16-3, May Special Session (MSS), makes numerous changes to this act including increasing the board's size from nine to 15 members and re-naming the “program” as an “exchange. ” Changes made by PA 16-3, MSS, are added throughout this summary. )

The act establishes requirements for “qualified employers,” i. e. , private-sector employers that employ at least five people, each of whom was paid at least $5,000 in wages during the preceding calendar year. “Covered employees” are those who have worked for a qualified employer for at least 120 days and are at least age 19.

Qualified employers must automatically enroll each covered employee in the program no later than 60 days after the employer provides the employee with certain information the act requires. In general, if the employee does not affirmatively choose a contribution level, the employer must enroll the employee with a contribution of at least 3% but not more than 6% of the employee's taxable wages (up to normal IRS limits). (PA 16-3, MSS, sets the default contribution at 3%. ) Employers cannot contribute to the program.

A covered employee may opt out of the program by electing a contribution level of zero. Qualified employers do not have to provide employees with the information or automatically enroll them if they maintain a retirement plan recognized under the federal tax code or approved by the authority. Employers that are not required to participate and individuals who are not automatically enrolled may participate under procedures established by the authority.

The act allows the authority to charge administrative fees to help defray program costs. It also sets penalties for employers that fail to remit contributions or enroll covered employees.

Under the act, the individual Roth IRAs (i. e. , after tax contributions only) must be established and maintained by the program or a third-party entity in the business of establishing and maintaining IRAs. Program assets must be held in trust or custodial accounts meeting IRS requirements.

The act requires the authority to offer Roth IRAs with a number of features, including options for age-appropriate target-date funds and procedures for distributions in accordance with applicable IRS rules. Interest, investment earnings, and investment losses must be allocated to each participant's IRA. A participant's benefit under the program must be equal to the balance in the participant's IRA as of any applicable measurement date set for the program.

The act vests the authority's powers in a board of directors. The governor selects the board chairperson with the advice and consent of the General Assembly. (PA 16-3, MSS, eliminates legislative approval of this selection. ) The board or its executive director, if one is appointed, must supervise the program's administrative affairs and activities. The act requires the board to adopt written procedures on, among other issues, annual budgets and hiring.

The act requires the authority's board members to act with care and solely in the interests of program participants. It also authorizes the attorney general to investigate violations of this requirement and to seek injunctive relief.

The act requires the authority to establish and maintain a secure internet website to help qualified employers identify vendors for retirement arrangements that the employers may implement instead of participating in the program. It requires the vendors registered and included in the website to bear the cost of establishing and maintaining the registration system and website.

The act bans the authority's board members, employees, and contractors from contributing to or soliciting contributions for campaigns for state elective office.

EFFECTIVE DATE: Upon passage for the provisions creating the authority and its board, requiring the authority to establish procedures, defining the IRA program, and banning political contributions; and July 1, 2016 for the provisions that conform the authority to existing laws on quasi-public agencies and payroll deductions.

1 — DEFINITIONS

Under the act:

1. “contribution level” means (a) the contribution rate the participant selects that may be (i) a percentage of the participant's taxable wages reported to the IRS or (ii) a dollar amount up to the maximum annual IRS deductible amount; (b) in the absence of the participant's affirmative election, 3% of the participant's taxable wages as required to be reported for federal tax purposes, or such other amount as the authority determines, but not more than 6%; or (c) for tipped employees, a percentage of the employee's pay and not a fixed dollar amount (PA 16-3, MSS, changes the automatic enrollment maximum contribution to 3%);

2. “covered employee” means an individual who (a) has been employed by a qualified employer for at least 120 days, (b) is at least age 19, and (c) performs work that is covered by state unemployment compensation law; and

3. “vendor" means (a) a regulated investment or insurance company conducting business in the state or (b) a company conducting business in the state to (i) provide payroll or recordkeeping services and (ii) offer retirement plans or payroll deposit IRA arrangements using products of regulated investment companies, but does not include individual registered representatives, brokers, financial planners, or agents. (PA 16-3, MSS, modifies the two definitions of vendor. One change requires that the retirement plan sponsors, investment companies, or insurance companies be federally regulated. The second expands the definition of payroll or recordkeeping businesses that also provide retirement plans or payroll deposit IRAs to include businesses that provide ancillary services, including technological services, and offer retirement plans or payroll deposit IRA products. )

2 — AUTHORITY AND BOARD OF DIRECTORS

The act creates the authority and deems it a public instrumentality and political subdivision of the state. The act specifies the authority is not a state department, institution, or agency.

It vests the authority's powers in a board of directors with nine voting members, each a state resident. The state treasurer and comptroller each serve as ex officio voting members. The appointing authorities and required qualifications for the other seven members are shown in Table 1 below.

Table 1: Board Member Appointing Authorities and Qualifications

Appointing Authority

Appointee must have a favorable reputation for skill, knowledge, and experience in:

House speaker

Interests of the aging population

House majority leader

Interests of employers in retirement savings

House minority leader

Retirement investment products

Senate president pro tempore

Interests of employees in retirement savings

Senate majority leader

Retirement plan design

Senate minority leader

Interests of plan brokers

Governor

Federal Employee Retirement Income Security Act (ERISA) or the IRS code

(PA 16-3, MSS, expands the board from nine to 15 members by adding the Office of Policy and Management (OPM) secretary, the Banking and Labor commissioners, and three additional members the governor appoints. One each of the governor's additional appointees must have a favorable reputation for skill, knowledge, and experience in the areas of: (1) annuity products, (2) retirement investment products, and (3) actuarial science. It also specifies that the House majority leader's appointee must have skill, knowledge, and experience in the interests of small employers regarding retirement products. )

Each ex-officio member may designate his or her deputy or a staff member to represent the member at board meetings with the power to vote on the member's behalf.

All appointments must be made by July 31, 2016 and any vacancy must be filled by the appointing authority no later than 30 calendar days after the office becomes vacant. (PA 16-3, MSS, extends the deadline for the appointments to January 1, 2017. )

Board members serve without pay but are reimbursed for all necessary expenses, within available appropriations, according to standard travel regulations. After an initial four-year term, all subsequent appointments are for six-year terms. Members may be reappointed.

Board Officers and Employees

The governor, with the advice and consent of both houses of the General Assembly, selects a chairperson from among the board members. The board annually elects a vice-chairperson and any other officers it deems necessary from among its members. (PA 16-3, MSS, removes the requirement that the legislature approve the chairperson. )

The board may appoint an executive director and assistant executive director, who serve at its pleasure. The executive director and assistant executive director are the authority's employees and are paid as the board determines.

The act prescribes other administrative aspects of the authority's operations, including designating an authorized officer or the executive director, if one is appointed, to supervise administrative affairs and keep program records.

Oath, Expenses, and Surety Bond

The act requires each board member to take the state oath of affirmation to uphold the state and U. S. constitutions not later than 10 calendar days after his or her appointment. The secretary of the state administers the oath, which must be filed in her office.

Each board member authorized by a board resolution to handle funds or sign checks for the program, and any other authorized officer, must, no later than 10 calendar days after authorization, (1) execute a $50,000 surety bond or (2) procure an equivalent insurance product for the same purpose. Alternatively, the chairperson may obtain a blanket $50,000 surety bond covering the executive director, board members, and other employees or authorized officers. The authority must pay the cost of each bond.

Quorum

Under the act, four board members constitute a quorum for the transaction of any business. (PA 16-3, MSS, requires eight members, rather than four, for a quorum. )

Conflict of Interest

The act bans board members, officers, or employees from having any financial interest in any corporation, partnership, or other legal or commercial entity that contracts with the authority.

But the act explicitly states it is not a conflict of interest under the act or any other statute for a trustee, director, officer or employee of a bank, investment advisor, investment company or investment banking firm, or a person having the required favorable reputation for skill, knowledge, and experience in retirement savings, to be a board member, provided the trustee, director, or employee abstains from discussion, deliberation, action, and vote by the board in respect to a matter related to the authority and its actions in which the firm has a direct interest.

Board Procedures

To implement the act's retirement security program (see 3), the board must adopt written procedures for the following:

1. adopting an annual budget and plan of operations, including a requirement for board approval before the budget or plan can take effect;

2. hiring, dismissing, promoting, and paying authority employees, instituting an affirmative action policy, and requiring board approval to create a position or hire someone;

3. acquiring real and personal property and personal services, including requiring board approval for any non-budgeted expenditure greater than $500;

4. contracting for financial, legal, and other professional services, with solicitations for proposals for each service required at least (a) every three years or (b) every 10 years for contracts to provide custodial, recordkeeping, or other services for providing IRAs;

5. making modifications to keep the program consistent with federal tax law and regulations and preventing the plan from being subject to ERISA's authority;

6. establishing an administrative process for the board to hear and address grievances, complaints, and appeals by participants and employees; and

7. using surplus funds to the extent authorized under the act or by law.

Upon the authority's termination all its rights and properties pass to and become vested in the state.

Protection from Individual Liability

The act provides protection from individual liability for any authority board member, director, or employee. This includes protection from civil liability for the authority's debts, obligations, or liabilities.

3 — RETIREMENT SECURITY PROGRAM

The act establishes the Connecticut Retirement Security Program to promote and enhance retirement savings for private sector employees in the state. It authorizes the authority's board to:

1. adopt bylaws to regulate the board's affairs and business;

2. establish criteria and guidelines for the retirement programs offered under the act (PA 16-3, MSS, requires the criteria and guidelines to (a) include that the program offer retirement choices provided by multiple vendors the authority selects, (b) establish a cap on the total annual fees, and (c) provide participants with information on each retirement choice's investment performance history);

3. receive and invest moneys in the program in any instruments, obligations, securities, or property in accord with the act;

4. contract with financial institutions or other organizations offering or servicing retirement programs;

5. employ attorneys, accountants, consultants, financial experts, loan processors, banks, managers, and other employees and agents as may be necessary in the board's judgment, and to fix the compensation of these individuals or agents;

6. borrow working capital funds and other funds as may be needed to start up and operate the program, provided such borrowing is only in the name of the authority (the money borrowed must be repaid solely from authority revenues);

7. make and enter into contracts or agreements with professional service providers, including financial consultants and lawyers, as necessary for the board to perform its duties and execute its powers;

8. establish policies and procedures for the protection of program participants' personal and confidential information; and

9. adopt an official seal, maintain an office as the board may designate, sue and be sued in its own name, and do all things necessary to carry out the act's provisions.

Administrative Charges & Fees

The act authorizes the authority to equitably apportion and charge the board's administrative costs and expenses to participants. It also allows the authority to require each participant to pay a fee to defray the program's costs. The authority determines the amount and method of collecting the fee. Presumably, the fee will be taken out of the participant's contribution, as is usual with IRAs. (PA 16-3, MSS, 99, (1) requires the authority to minimize total annual fees charged to participants and (2) beginning in year five of operation, limits annual fees to 0. 75% of the total program assets' value. )

Under the act, no employer will be required to fund or be responsible for collecting the fees from participants.

Memorandums of Understanding (MOU) Regarding Employee Information and Administrative Cost Sharing

The act requires the board to enter into MOUs with the Labor Department and other state agencies on:

1. gathering or disseminating information needed to operate the program, subject to confidentiality rules as may be agreed to or required by law;

2. sharing the costs incurred by gathering and dissemination of this information; and

3. reimbursing the costs of any enforcement activities conducted by the attorney general.

5 — ROTH IRAS

The act requires the program to establish and maintain a Roth IRA for each program participant either by the program itself or by a third-party entity in the business of establishing and maintaining IRAs. The assets must be held in trust or custodial accounts meeting the federal requirements for IRAs (Internal Revenue Code of 1986, 408 (a) or (c), as amended from time to time).

The act requires the program to allocate interest, investment earnings, and investment losses to each participant's IRA. A participant's benefit under the program is equal to the balance in the participant's IRA as of any applicable measurement date prescribed by the program.

The act requires the authority to establish procedures to prevent a participant's contributions to the IRA program from exceeding the annual maximum deduction amount set in federal tax law (26 USC 219(b)(1)).

Unclaimed Funds

Under the act, any unclaimed funds in a participant's IRA after three years of inactivity must be treated as unclaimed funds under existing state law (CGS 3-57a).

State Exempt from Liability

The act explicitly exempts the state from any liability (1) related to payments to a participant or beneficiary or (2) of the authority. The authority is only liable for benefits with respect to the IRAs it maintains.

4 — INFORMATIONAL MATERIAL

The act requires the authority's board of directors to prepare informational material for qualified employers to distribute to participants and prospective participants. At a minimum, these must include:

1. the benefits and risks associated with making contributions to, or withdrawals from, the program;

2. the program contribution process, including a contribution election form;

3. clear and conspicuous notice regarding the default contribution level;

4. how a participant may opt out of the program by electing a contribution level of zero;

5. the retirement savings withdrawal process, including an explanation of the tax treatment of withdrawals;

6. how to obtain additional information about the program, including investment option information;

7. a description of relevant state and federal regulations, including those addressing contribution limits; and

8. other information the board sees fit to provide to participants, potential participants, and qualified employers.

Quarterly Statements

At least quarterly, the board must provide a statement to each participant that includes, at a minimum:

1. the participant's IRA account balance, including the value of the participant's investment in each selected investment option;

2. the investment options available to each participant and the process for selecting investment options for his or her contributions, as allowed in state law or by the authority;

3. the fees charged to each participant's IRA and a description of the services provided for the fees; and

4. if the board chooses, an estimate of the income the account is projected to generate for a participant's retirement based on reasonable assumptions.

Annual Fees Notice

At least annually, the board must provide each participant with information on program fees and the various available investment options. This may be provided in the form of a prospectus or similar document.

Electronic Dissemination of Notices

The act allows the board, provided it meets public notice requirements, to adopt policies and procedures for the electronic dissemination of any required notices or information to participants, potential participants, and qualified employers.

6 — BOARD DUTY TO ACT WITH PRUDENCE AND IN PARTICIPANTS' INTEREST

The act requires the authority to act:

1. with the care, skill, prudence and diligence that a prudent person familiar with such matters would use in a similar situation;

2. solely in the interests of program participants and beneficiaries;

3. for the exclusive purposes of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the program; and

4. in accordance with the act's provisions and any applicable statutes.

To the extent reasonable, the board must require any agents the authority engages or appoints to abide by the same standards (PA 16-3, MSS, 100, applies the standards to the board's vendors, rather than its agents).

7 — EMPLOYER RESPONSIBILITIES AND AUTOMATIC ENROLLMENT

By January 1, 2018, and in each subsequent year, the act requires qualified employers to provide each of their covered employees with the informational material the authority must prepare. For any employee (1) hired on or after that date or (2) who is not a covered employee, a qualified employer must provide the material within 30 days, or another time period the authority prescribes, after the employee's hiring or the employee becomes a covered employee.

Within 60 days after providing the material, or another time period the authority prescribes, qualified employers must automatically enroll each of their covered employees in the program at a contribution rate the employee selects or the default contribution level the act allows when an employee does not actively select a rate. The contributions must be made under the provisions of the automatic enrollment law that allows an employer to make enrollment contributions to retirement accounts on an employee's behalf without the employee's affirmative decision to make the contribution.

The act prohibits employers from making contributions to the program. (Employer contributions would subject the program to ERISA's regulatory authority. In general, retirement programs that include private sector employer contributions are regulated under ERISA. )

Employee Opt-Out

The act allows employees to opt out of the program by electing a contribution level of zero.

Delaying Program Start Date

The act permits the authority to delay the program's effective date, in whole or in part, and for particular categories of employers, as it deems necessary to implement the act's provisions and minimize potential disruptions and burdens for any qualified employer. The board must notify the Labor Committee of any planned delay in the program no later than seven days after the decision to delay. The notice must include the purpose of the delay and the new effective date.

Exempt Employers

Under the act, a qualified employer that maintains a retirement plan recognized under the federal tax code or approved by the authority is exempt from the requirements to provide the informational material and automatically enroll qualified employees. An employer can lose this exemption if the authority determines that:

1. as of the first day of the previous calendar year, no new participant was eligible to be enrolled in the employer's retirement plan and

2. on and after the first day of the previous calendar year, no contributions were made to the retirement plan by or on behalf of a participant.

Optional Program Participation

An employer not otherwise required to participate under the act may make the program available to its employees subject to rules and procedures the authority establishes. But the act prevents such an employer from requiring an employee to enroll.

Individuals who are not automatically enrolled in the program may also participate according to procedures the authority establishes. The authority must provide them with the required information before they enroll.

Account Rollovers

To the extent allowed under the IRS code, the act requires the authority to allow anyone to roll over funds from their other retirement accounts into their IRA under the program.

Transmitting Withheld Funds

The act requires qualified employers to transmit withheld employee contributions on the earliest day that the amount held can be segregated from the employer's assets, but no later than the 15th business day of the month following the month in which the covered employee's contribution was withheld from his or her paycheck. (PA 16-3, MSS, instead requires (1) transmitting the contribution on the earliest date it can be transmitted and (2) that the transmittal take place no more than 10 business days after the date the employee's contributions were withheld. )

Tax Credit Information

The act requires the authority to provide small employers with information regarding tax credits available for businesses that start employee retirement programs.

8 & 9 — DESIGN FEATURES

The act requires the authority to provide that each participant's IRA be invested in (1) an age-appropriate target date fund, (2) a designated lifetime income investment that provides participants with a source of retirement income for life or (3) other authority-prescribed investment vehicles. (PA 16-3, MSS, specifies that the fund must be with an investor the employee selects or, when an employee does not select a specific vendor or investment option within the program, invested in an age-appropriate target date fund that most closely matches the participant's normal retirement age. ) The act does not define “target date fund,” although target funds, also known as lifecycle funds or age-based funds, typically involve a plan where the investment approach becomes less aggressive as the participant gets older.

The act requires that the lifetime income investment option have certain features which must be available only if the authority determines them to be feasible and cost effective. If this is determined to be the case, the program must include the following features:

1. designate a lifetime income investment option with spousal rights to provide participants with a lifetime source of retirement income;

2. disclose to each participant, one year before the participant's normal retirement age, (a) the rights and features of the lifetime income investment; (b) that at normal retirement age, 50% of the participant's account will be invested in the lifetime income investment; and (c) that the participant may choose to invest a higher percentage of his or her account balance in the lifetime income option;

3. invest 50% of the account balance, or a higher amount if the participant so chooses, in the lifetime income investment when a participant reaches normal retirement age;

4. permit each participant to elect a date no earlier than his or her normal retirement age to begin receiving distributions, provided, in the absence of an election, the distributions start within 90 days after he or she reaches normal retirement age; and

5. establish procedures so participants may invest a higher percentage of their account balances in the lifetime income investment.

Fund Distribution

The authority must establish rules and procedures for Roth IRA fund distribution that allow for the same distribution as the IRS code. Normal retirement age under federal tax law is 59 for Roth IRAs (26 USC 408A).

Right to Withdraw Funds

The board must inform participants about their rights to withdraw funds from the program in accordance with the federal tax code. For participants who elect to withdraw their assets before their normal retirement age, the authority must notify them of any tax penalties associated with the withdrawal and the effect of the withdrawal on the person's retirement income.

10 — ATTORNEY GENERAL OVERSIGHT

The act authorizes the attorney general to investigate any alleged violation of the act's requirement that the authority act with prudence and solely in the participants' interests. If the attorney general finds that any board member or authority agent violated or is violating that duty, he may bring a civil action in Hartford Superior Court against the board member or agent. The remedies available to a court in any such action are limited to injunctive relief. The act specifies that nothing in this section can be construed to create a private right of action. However, an employee or the labor commissioner may bring a civil action against a qualified employer who fails to enroll a covered employee as required by the act (see below).

10 — EMPLOYER PENALTIES

The act makes it a violation of the law regarding an employer's ability to withhold employee wages if a qualified employer fails to timely remit an employee's contributions to the program. By law, violations are punishable by imprisonment and fines on a sliding scale depending on the amount of wages involved (e. g. , if unpaid wages are more than $2,000, it is punishable by imprisonment of up to five years, a fine of at least $2,000 but not more than $5,000, or both).

If a qualified employer fails to enroll a covered employee as the act requires, the covered employee or the labor commissioner may bring a civil action to require the employer to enroll the employee and may recover the costs and reasonable attorney's fees.

11 — BOOKKEEPING AND AUDITS

Under the act, the authority must keep a detailed account of its activities, receipts, and expenditures and report these items to the authority board, the governor, the Auditors of Public Accounts (“auditors”), and the Labor and Finance, Revenue and Bonding committees by December 31 each year. The report must be in a form the board prescribes and include authority activities for the next fiscal year. The report is subject to the auditors' approval.

The act authorizes the auditors to conduct a full audit of the authority's books and accounts pertaining to its activities, receipts, expenditures, personnel, services, or facilities. For the purposes of the audit, the auditors have access to the authority's properties and records and may prescribe methods of accounting and periodic reporting for authority projects.

Furthermore, the act requires the authority to enter into MOUs with the state comptroller in which the authority must at a minimum provide, in a form the comptroller prescribes, information on the authority's current revenues and expenses, including the sources or recipients, relevant dates, and the amount and category of each revenue or expense.

12 — STUDIES

The act requires the Connecticut Retirement Security Board to study whether program participants and potential participants have interest in a traditional IRA option, including the (1) number of those whose incomes exceed federal limits for contributing to Roth IRAs and (2) percentage of current participants who would prefer a tax-deferred plan. The board must submit the report by January 1, 2019 to the Labor and Public Employees Committee. (Presumably, the authority must conduct the study instead of the Connecticut Retirement Security Board, which the act eliminates as of July 1, 2016 (see below). )

It also authorizes the authority to study the feasibility of the state or the authority making a multiple-employer 401(k) plan or other tax-favored retirement savings vehicle available to employers.

13 — WEBSITE FOR EMPLOYERS AND VENDORS

The act requires the authority to establish and maintain a secure website to (1) provide qualified employers with information on employer-sponsored retirement plans and payroll deduction IRAs and (2) help qualified employers identify vendors for retirement arrangements that employers may implement instead of participating in the program. The website address must be included in any posting on the website and in any program material offered to the public.

Before establishing the website, and at least annually each following year, the authority must notify vendors that the website is active, that the vendors may register for inclusion on it, and how they can do so. The act requires each vendor seeking to register for the website to provide a:

1. statement of the vendor's experience providing employer-sponsored retirement plans and payroll deduction IRAs in this and in other states, if applicable;

2. description of the vendor's types of retirement investment products; and

3. disclosure of all expenses paid directly or indirectly by retirement plan participants, including, but not limited to, penalties for early withdrawals, declining or fixed withdrawal charges, surrender or deposit charges, management fees and annual fees.

The act requires registered vendors to bear solely and equally the cost of establishing and maintaining the registration system and website, based upon their total number.

The board may remove a vendor from the website if the vendor (1) submits materially inaccurate information to the board, (2) does not remit assessed fees within 60 days after the assessment, or (3) fails to notify the board of any material change to the vendor's registered investment products.

The board must give any vendor found to have submitted inaccurate information to the board 60 calendar days to correct the information. The board must also establish an appeals process for vendors denied registration or removed from the website.

14-19 — CONFORMING CHANGES

The act makes conforming changes by adding the new authority to existing law addressing quasi-public agencies and (1) the state code of ethics, (2) authority borrowing and bonding power, and (3) liability protection for board members and employees when performing authority duties. It also makes conforming changes to state law regarding employers' authority to withhold funds from employees' paychecks for automatic deductions for retirement plans.

20 – BAN ON POLITICAL CONTRIBUTIONS

The act bans authority board members (except the comptroller or state treasurer), or any executive director, assistant executive director or authorized officer the board appoints, or an authority contractor or principal of a contractor, from making political contributions to, or knowingly soliciting contributions from the board's or the executive director's or assistant executive director's employees.

The ban applies to contributions or solicitations for the following:

1. an exploratory committee or candidate committee established by a candidate for nomination or election to the office of governor or any other state constitutional officers, or state senator or state representative;

2. a political committee authorized to make contributions or expenditures to or for the benefit of such candidates; or

3. a party committee.

The act specifies that its provisions are severable in the event any provision is held invalid or unconstitutional.

21 — REPEALERS

The act repeals the law creating the Connecticut Retirement Security Board and its duty to create a public retirement plan.

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