Senate Leadership
February 21, 2008
Connecticut Could Become First State to Offer State-Administered 401(k) Plan For Small Businesses
Plan proposed by Senate Democrats and Comptroller Wyman could help employees earn $1.6 million for retirement
Senator Williams speaks at a press conference announcing a plan with the State Comptroller to create a pool of retirement savings plans such as 401(k)s to be made available to small business employees and the self-employed at cost savings that will benefit individuals and the economy. With Senator Williams is Senator Gary LeBeau, co-chair of the Commerce Committee, and State Comptoller Nancy Wyman. (February 21, 2008)
State Senate President Donald E. Williams, Jr. (D-Brooklyn) joined State Comptroller Nancy Wyman, Senate Majority Leader Martin Looney (D-New Haven), State Senator Gary LeBeau (D-East Hartford), and a small business owner at a news conference today to announce a proposal to create a state-administered deferred compensation plan--including a 401(k) plan--to small businesses, self-employed individuals, and not-for-profits. If enacted, Connecticut would become the first and only state in the nation to offer such a plan.
Currently, about 75 percent of Connecticut's small businesses (those with fewer than 100 employees) do not offer retirement plans. One significant reason for this problem is that due to their size, small businesses cannot achieve the economies of scale that make 401(k) programs useful to their employees; fees are too high to allow meaningful growth for retirement.
The few companies that do participate face higher fees for workers trying to save for retirement. Nothing confirms the old axiom "keep track of your pennies and the dollars take care of themselves" more than this fact: for every 1 percent increase in administrative fees, a worker must work more than 2-1/2 years longer to achieve the same level of pension savings achieved in plans with lower fees.
"The fees associated with 401(k) plans have a disproportionate impact on people who work for small businesses," said Senator Williams. "The result is that 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. Our proposal will help people save for retirement and instantly give our small businesses a real advantage over out-of-state competitors."
Comptroller Wyman said the program will be an extension of the retirement-savings plans that her office currently administer for state employees.
"My commitment to encouraging retirement savings is evidenced by the fact that in the past two years the assets in the state plans have more than doubled to approximately $2 billion--both through increased participation and lowered fees," Comptroller Wyman said. "Those assets give the state enormous leverage to offer small businesses a very affordable investment plan. I believe that this proposal can be another way in which state government uses its tremendous resources to help small business thrive."
"People are getting squeezed, and it is increasingly getting more difficult to save for retirement," said Senator Looney. "We hear stories of people raiding their 401(k) plans to pay their mortgage. This plan will make it easier to save and help workers get a lot more bang for their buck."
"This is one of a series of actions that we are going to take this year to help small businesses," said Sen. LeBeau, who is co-chairman of the Commerce Committee. "This proposal speaks directly to entrepreneurial and business activity in Connecticut, because one of the areas where we're lagging the nation is in growth in small business employment."
Our Proposal: Authorize the Comptroller's Office to submit a Request for Proposals (RFP) with the goal of establishing a state-administered deferred compensation plan--which would include a 401(k) plan--open to any small employers, including those who wish to participate by contributing on behalf of employees who participate. The plan would be initiated and administered by the Comptroller's Office.
Cost: Start-up costs are minimal and could be recouped through administrative fees (in the same way that plans on the market recoup fees) and repaid to the General Fund over the first few years. The net cost to the state would therefore be zero.
Background: The state of Connecticut currently operates a 401(a) defined contribution plan, an IRC section 457 deferred compensation plan, and a 403(b) retirement savings plan for state employees. According to the State Comptrollers Office (OSC), the new 401(k) plan, which would be regulated by the Employee Retirement Income Security Act of 1974 (ERISA), would not be open to state employees.
The cost reductions could enable access to plans for the employees of the small businesses that currently do not offer such retirement plans to their employees. The OSC estimates that investors could save about 50 percent on fees through a state-administered plan. This savings could mean that, on average, workers would have to work four fewer years to achieve the same retirement savings they would have achieved under otherwise available plans. This means that a typical worker earning $46,250--the average wage of a worker in the manufacturing sector--and saving 10 percent of their income would earn about $1.6 million toward retirement. This is $350,000 more than the same worker would have earned in the more costly private plans.
Download a handout that shows hypothetical examples of individual retirement savings under this plan (PDF file).
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