As time is running out for the U.S. Senate to roll back a Labor Department safe harbor for state-run retirement plans, small employers in one state remain largely in the dark about what new regulations will mean for their businesses.
LIMRA Secure Retirement Institute held a series of focus groups with small business owners in Connecticut, where a law was passed in 2016 requiring employers with at least five employees to offer a private sector retirement plan, or enroll workers in a new auto IRA program run at the state level.
Only a small number of participants in the focus group, which included owners or decision makers in businesses that do not offer a private sector plan, knew much about Connecticut’s new option, according to LIMRA’s findings. And misconceptions were common among those that claimed familiarity with the plan.
Connecticut’s law effectively creates a retirement plan requirement for small business owners, who can offer the state option alongside a privately administered plan. Employers that do offer a plan will be allowed to drop it in favor of the state option, which will include a target-date fund, a prohibition on employer contributions to IRAs, and require a minimum of 50 percent of total assets to be invested in a lifetime income option at retirement.
The Labor Department’s safe harbor will allow states like Connecticut to operate plans outside of the Employee Retirement Income Security Act’s requirements, meaning employers that participate in the program will not be considered fiduciaries.
That distinction bothers opponents of the safe harbor, who call it a regulatory loophole that will deprive retirement investors of ERISA’s consumer protections.
Opponents also argue the state plans will encourage small employers that offer 401(k) plans to drop them and instead move workers to state-run options. And employers with employees in different states will face the burden of complying with more than one state law, as measures already adopted in Connecticut and other states are designed differently.
The Senate is expected to consider a resolution of disapproval for the safe harbor this week, or next week at the latest. Under the Congressional Review Act, only a simple majority will be needed to kill the safe harbor, but Congress has a time limit to use the CRA to roll back newly issued regulations.
Last week, a consortium of employer and investment industry advocates, including the Chamber of Commerce, the Investment Company Institute, and the American Benefits Council, sent a letter to each member of the Senate, urging that the safe harbor be rolled back. Sen. Bob Corker, R-TN, has said he will vote to keep the safe harbor in place. Several other Republican senators reportedly have concerns that rolling back the safe harbor will infringe on states’ rights.
In California, officials have said they intend to go ahead with its state retirement initiative no matter the fate of the safe harbor.
In Connecticut, where lawmakers are facing a $2.2 billion revenue shortfall, the state will clearly have to invest in further outreach to small business owners if it plans to enact its new retirement plan by 2018, when it is slated for official rollout, says Catherine Theroux, LIMRA’s director of public relations.
“The employers that knew anything about the law knew very little,” Theroux said of LIMRA’s focus groups with small employers. “That’s the one clear take away—a lot more needs to be done communicating what the program is, how it would work, and what employers would be responsible for.”
LIMRA’s agnostic report shows that a “significant minority” of employers had not even heard of the plan. Upon learning its parameters, reaction ranged from those that strongly favored state-run plans to those strongly against the law.
Those that favored the plan acknowledged a retirement crisis, and said they favored the state stepping in to offer a benefit that has previously been too expensive for small employers to offer.
Those against the law said they were leery of Connecticut’s ability to properly manage the program, and conflated the new auto-IRA retirement plan with the state’s well-publicized underfunding of the State Employees Retirement System pension, which by some measures is only funded at 36 percent of liabilities.
Some employers were dubious of a new government mandate, and expressed concerns over the cost they would bear to deduct contributions from payroll.
LIMRA’s report found that the employers, on balance, are unfamiliar with the positive correlation between payroll deductions and employees’ savings rates seen with private sector defined contribution plans.
That fact can be chalked up to a lack of experience in offering savings plans, says Theroux.
“These people are running restaurants, or salons, or lawn maintenance companies—many of them are just worried about making payroll,” she said. “Retirement savings programs have not been on their radar. The differences between defined contribution and defined benefit, and the nuance of the complicated nature of one versus the other is not something they fully understand.”
LIMRA’s evidence also shows confusion among small employers over the role of annuities in Connecticut’s state plan; some questioned whether requiring 50 percent of assets in lifetime income options at retirement was too high.
But on balance, many employers were warm to the overall objective of the plan, once it was explained.
“In general, business owners do seem to like most aspects of its design. Still, some have objections, most notably not trusting the State of Connecticut,” the report concluded.