Connecticut is planning to offer first small-business 401(k) plan

Connecticut is seeking to become the first state to offer a low-cost 401(k) plan designed for small businesses.

The state comptroller’s office has proposed that a bill be introduced in the Legislature to create a 401(k) plan for small businesses that can’t otherwise afford to offer such retirement plans.

Investment options would mirror the 20 options in Connecticut’s 401(a), 457 and 403(b) plans. Those plans, administered by ING Retirement Services of Hartford, have institutionally priced mutual funds and fees consistent with government-sponsored plans.

“The fees associated with 401(k) plans have a disproportionate impact on people who work for small businesses. The majority of these employees don’t have 401(k) plans, and at the same time, the small businesses are at a competitive disadvantage when it comes to recruiting workers,” said Thomas Woodruff, director of retirement and benefit services for the state’s defined contribution plans.

The plan has been met with some opposition, Mr. Woodruff said. “Financial services companies aren’t thrilled with it, because the fees are lower than those offered to small businesses on their own,” he said.

Last week, the Arlington, Va.-based American Society of Pension Professionals & Actuaries came out against the legislation.

“A free and competitive market is the best system for 401(k) plans in Connecticut or any other state,” said Michael E. Callahan, past president of the organization, and head of a pension firm in Connecticut.

Roughly 75% of Connecticut employers with fewer than 100 employees do not offer retirement plans, he said. Mr. Woodruff added that the lower fees available through a state-sponsored plan could provide an incentive for employers to join the proposed plan.

Defined contribution experts are hoping Connecticut will succeed, opening the door for other states.

SIGNIFICANT MOVE

J. Mark Iwry, a non-resident senior fellow for The Brookings Institution in Washington, said this is a very significant move, not just for the state of Connecticut but the industry as a whole.

“We have a chronic pension coverage and savings problem: A majority of American workers have no employer-sponsored plan [even more than the number who lack health coverage]. We’ve tried for decades to crack that barrier, and we’re undersaving as a nation,” Mr. Iwry said.

“This is an exciting development, designed to help expand retirement savings,” added Mr. Iwry, who has drafted proposed legislation for about a half dozen states considering similar proposals. In addition to Connecticut, the state-assisted saving concept is coming onto the radar screen in Washington, Maryland, West Virginia, New Hampshire, California and other states, he said.

Mr. Woodruff said chances of passage are good.

“There’s a significant Democratic majority in the Senate and Assembly,” he said, “and there’s a lot of support for it across the board. We’re very confident it will go forward.

“We estimate that investors could save about 50% on fees through a state-administered plan,” Mr. Woodruff added, declining to provide an asset projection for the proposed plan.

“Smaller employers have higher costs because [plan expenses are] spread over fewer employees and they have lesser bargaining power than that of a larger employer,” Mr. Iwry said. “The state will pool the smaller employers for bargaining power. That is the core concept here … that the economies of scale will be realized.”

A worker earning $46,250 — the average income of an employee in the manufacturing sector — and saving 10% of his or her income would earn about $1.6 million toward retirement, Mr. Woodruff said. That would be $350,000 more than the same worker would have earned in more expensive private plans.

“The concept is curiously simple but hasn’t been done before — largely because it would not occur naturally to most of us working on pension issues. Our pension system is a federally regulated system. The natural thought process of pension types like us is that it’s all about Congress, the [Pension Benefit Guaranty Corp. of Washington, Internal Revenue Service] and [Department of Labor],” Mr. Iwry said.