Middleman: The Costs and Benefits of Connecticut’s Retirement Program

In his first press conference as the newly elected State Comptroller, Sean Scanlon announced the roll-out of Connecticut’s long-awaited state retirement program called MyCTSavings. 

The program, which was originally passed by the legislature in 2016, was part of a newborn trend in several states to offer private sector employees who do not have access to a traditional retirement savings plans – like a 401(k) – through their employer the ability to save money for retirement with a payroll deduction. 

Under the program, employers who do not offer a qualifying plan to their employees are required to provide the state with their workers’ names and information, automatically enrolling the employees in the MyCTSavings program through a payroll deduction. There is no cost, other than administrative time, to the employer, and employees can opt out of the program if they don’t want to continue contributing.

During the press conference, Scanlon announced they were in the third phase of their rollout plan, reaching out to 22,000 employers across the state and informing them of their need to register. Although Connecticut was one of the first states to put such a program in place, Oregon and California executed their rollouts much more quickly and, thus far, the programs appear to be a success. 

California’s CalSavers program has amassed over 403,000 savers and more than $450 million in assets. Oregon’s OregonSaves program has reached $165 million in assets. The idea has rapidly spread across the country; other states like Colorado, Maryland and Virginia have launched their own retirement savings programs as well and many more are poised to launch programs in the near future.

“I think there’s no stopping them now. There are so many states with this on the books and more coming. I think you’re seeing many states were waiting in the wings to see what would happen in Connecticut, what would happen in California, in Oregon and they’re not going away,” said Aiden Yeaw, a financial consultant and now chief operating officer of a crypto company who previously worked for Ascensus, the company originally tasked with managing the OregonSaves program. “I think you’re seeing a kind of an arrival of all the states saying the automatically enrolled mandated IRA is the way to do this.”

Certainly, some financial and business associations grumbled at the prospect when it was originally debated in the legislature, arguing that any worker with a paycheck and a bank account has access to such plans through a financial institution and that it was another administrative burden on Connecticut businesses. 

There was even a court case over California’s program that threatened to undo all state retirement savings programs, challenging whether such programs were legal under the Employee Retirement Income Security Act (ERISA). Those challenges, however, were ultimately defeated and since then state programs have proliferated.

Despite the challenges and concerns, however, most seem to agree that Connecticut’s heart is in the right place and that workers who, perhaps, didn’t have a retirement savings plan prior to 2023 will now automatically be enrolled in a retirement program building a nest egg for the future, in addition to social security. It gets them invested in the market and could possibly ease financial strains, as well as ease potential dependence on state assistance in the future.

Such options were always available to workers through financial institutions, but MyCTSavings adds the convenience of essentially doing the work for them and doing through a payroll deduction.

“I was a little apprehensive at first because, ‘We’re here from the state of Connecticut and we’re here to help;’ so I always have a little to worry about how much help or work or red tape it’s going to cause,” said Christopher Lee of New England Capital Financial Advisors. “But when this came out, I took a look at it and it’s not a horrible program. I think it’s good, I think it’s something good to have.”

“I’m really a believer in these programs, I think they made sense from a variety of perspectives. Today we’re a very polarized atmosphere but this is something that should appeal to a broad spectrum of opinion,” said Professor Edward Zelinsky of Yeshiva University’s Benjamin N. Cardozo School of Law. 

Zelinsky served, along with other volunteers, on the Connecticut Retirement Security Authority, the original governing board of Connecticut’s retirement program, and he participated in molding the MyCTSavings program into what it is today. He remains a member of MyCTSavings’ advisory board.

“Progressives talk about wanting to abate the wealth disparities that exist in American life. Well, there are very few practical programs doing this, this is one of them. I very much favor this program because I hope that over time people collecting money in their IRAs will help reduce wealth disparities,” Zelinsky said. “I also think a certain kind of conservative, a Maggie Thatcher or Ronald Reagan conservative should like this also because it’s turning low-income people into investors and savers.”

The program is especially supported by the Connecticut AARP who say that social security is rarely enough to live on, especially in a high cost of living state like Connecticut, and that the program will “level the playing field,” for workers without access to traditional 401(k) programs through their employers.

MyCTSavings is basically an administrative pass-through to create a Roth-IRA account, meaning the payroll deduction is made after the employee has already paid their taxes and there are limits to how much they can save per year.

During his press conference, Scanlon said that a worker in their 30s earning $50,000 per year and saving only 3 percent of their income, could amass up to $250,000 by retirement age. Not enough to retire on completely, but, combined with social security which pays out on average $1,600 per month, it’s a substantial addition.

Although the program is now run by the Comptroller’s Office, rather than the CRSA, the actual investment of savers’ money is handled by a middleman, a relatively new financial tech company called Vestwell.

Connecticut originally contracted with Sumday, an affiliate of the Bank of New York Mellon. Vestwell was already providing services for Sumday, but in 2021 Vestwell acquired Sumday and all its assets from BNY Mellon, instantly putting them at the forefront of managing state retirement plans. The acquisition has served them well as more and more states create retirement saving programs and look to Vestwell to manage them as basically the only game in town.

“Vestwell was off and running, and they were able to kind of get a jump start by taking over that business,” Yeaw said. “They won more business, kept levering up this capability, going to Colorado’s program, Virginia’s; they kind of benefitted greatly from that Sumday acquisition but they’ve kind of taken the ball forward and kept going.”

Vestwell essentially saw an opportunity and took advantage of it, because the major commercial entities like Fidelity and Vanguard aren’t interested in taking on these small savings accounts, according to Zelinsky.

“Vestwell is making the bet that by getting their foot in the door that, as these programs mature, they will have a first mover advantage,” Zelinsky said. “But the whole reason there is a state program and why I’m a strong supporter of state programs is that the private sector has not on balance found it in its interest to serve these small accounts.”

However, Vestwell’s services are not free. And as the employer in Connecticut is not on the hook for the MyCTSavings program, the costs for delivering Vestwell’s services come out of the employees’ savings through fees assessed against their account. 

Naturally, there are fees associated with every retirement savings program, it’s how the banks make their money, too. But the fees associated with the MyCTSavings program are, in many instances, 10 times higher than the fund fees into which their money is invested. Employees could open their own retirement accounts through those same entities and pay far less in fees.

Because the state is automatically enrolling workers who, by its own admission, are likely not saving for retirement and are likely not familiar with investing, the lingo, numbers and what those numbers mean, it’s worth breaking down how those fees affect savers in the long run and, depending on how you calculate the costs, they can be quite high.

According to the MyCTSavings website, investors — called “savers” in state retirement program parlance — pay two different fees: one is a flat $26 account fee, which is divided quarterly, meaning $6.50 is taken from the saver’s account each quarter. The second is an annual expense fee of .25 percent of the value of the account, compounded daily. 

The MyCTSavings webpage lists the expense fee as “approximately,” which is a rather odd thing to say when it comes to money management.

What it really means is the saver is paying .22 percent in MyCTSavings fees plus the underlying investment fee, which ranges from .0317 to .1 percent, for the funds into which their money is deposited. That means the asset based fee can range higher than .25 percent, up to .32 percent.

Essentially, the saver would only pays between .25 cents and .32 cents in MyCTSavings asset-based fees for every $100 in their retirement account.

On the surface this doesn’t sound steep, and while those fees are much higher than fees for the funds savers’ money will be invested into – the fee for a Fidelity Total Market Index Fund, one of the funds into which savings are invested, is .015 percent – they are, on the whole, “not horrible,” according to Christopher Lee, although he does say he’d like to see the expense fee lower.

“Just referring to MyCTSavings, specifically from a cost perspective, it’s not horrible just because the undertaking is quite a bit as far as the work involved for this,” Lee said, noting that there is a vast amount of paperwork involved on Vestwell’s part.

So, there is a lot of work in administering hundreds, if not thousands of small accounts that may only be a couple hundred or a couple thousand dollars. It’s part of the reason why big banks and financial institutions are not yet involved in state retirement programs. But there is also the convenience of having a payroll deduction, rather than having to go to a financial institution, open your own account and manage your investments.

“The fees are high, and I think we have to deal with the reality that, first of all, there aren’t a lot of companies that want to do this business,” Zelinsky said. “Vestwell is performing other services here, and you, in those cases, would have to do those services yourself, so they’re doing administrative services.”

Overall, on a flat dollar-for-dollar basis, over the course of a thirty-year career earning $50,000 per year and deducting 3 percent of pay, a saver would pay around $780 in flat fees and $5,400 in expense fees. Really, not bad when spread across 30 years and amassing savings over $250,000. 

Extended to a 40-year career – someone beginning work and saving at age 25 and retiring at 65 – the fees would obviously add up to a bit more, but the saver’s nest egg could potentially grow to more than $650,000 – the magic of compounding returns.

What those dollar-for-dollar sums don’t account for is lost growth for the saver, and this is where it can get tricky and add up quickly. Since those fees are deducted from the saver’s account it means the money is no longer part of their investment and therefore not growing.

Assuming a 30-year career, making only $50,000 per year and investing 3 percent into MyCTSavings, with the historical market rate of return at 10 percent, the fees being deducted from the saver’s account would average $18,530 in lost growth.

Extended to a 40-year career and the “magic” of compounding returns becomes a much bigger beast. Using the same assumptions, the saver’s lost investment growth averages $65,108, losing more than a full year’s salary.

That may be an acceptable loss to some; to others, it may not be. But they are not numbers easy to calculate for someone who may have little financial knowledge or is not familiar with the intricacies of compounding growth, losses, etc. And while the fee structure is spelled out on the MyCTSavings website, what those fees mean in the long run for savers is not.

By comparison, had the saver invested directly without the MyCTSavings middleman, the growth losses for the fund expense fees would average $3,774 for a thirty-year career, and $14,317 over the course of a 40-year career — four and half times less than the state program.

So, there is a price to pay for the middleman, Vestwell, to do the investing and administrating for thousands, if not hundreds of thousands of accounts as the program grows from its infancy into something possibly larger. It depends on what the saver wants to do, whether they want their money deducted in the first place, and whether they want to invest directly or go through the state’s program.

Yeaw says part of the problem with state plans like Connecticut’s is that employees are automatically enrolled without understanding the intricacies of the plan and choosing to opt into it. 

“People are automatically enrolled whether they’re paying attention or know what’s going on,” Yeaw said. “Maybe they don’t communicate in English, or maybe it just goes right over their heads. I think there’s a fair amount of, do the savers really know? Do they really know what’s going on? Whether the fees are correct or not?”

“Certainly, there’s huge convenience factor in terms of having a payroll deduction. I won’t deny that that’s a big thing and an important thing to create the right behaviors for people,” Yeaw said. “It’s way easier when you have a payroll deduction for these things, but when you really look at the costs relative to alternatives in the marketplace, they start to really lose their luster.”

“It is a lot of work, so I don’t think that it’s horrible, and they’re using some target date funds which I think is good too,” Lee said. “So, this at least gives clients a chance to set up a Roth IRA, so that’s the good part of this is it grows tax free and really has a chance to grow using those target date funds.” 

“They could go to one of the bigger places like a Fidelity or a Vanguard or something along those lines and set up accounts there for the same type thing, but the ease of setting up some of that stuff can push people away if it looks like it’s a lot of work,” Lee said.

To be clear, setting up a similar Roth-IRA through a financial institution can be done online or on the phone and it is possible to set automatic account withdrawals from one’s bank account. The difference is that with the payroll deduction, the money never makes it to the saver’s bank account.

To test out the ease of opening a Roth-IRA through a financial institution, this reporter went to Fidelity and opened one in about ten minutes online. Less than 24 hours later, after verifying bank information, $100 was deposited into the Roth-IRA, which could then be invested into the very same funds listed by MyCTSavings.

Did it take long? No. Was it a bit overwhelming and confusing when viewing the thousands of investment options and reading through the jargon? Yes. It gets intimidating.

However, it is also possible that Vestwell’s fees could be lowered in the future as MyCTSavings grows in size. According to the current contract with Vestwell, the fees will automatically decrease when certain asset thresholds are met.

“The fees are an issue but, frankly at this stage, the program is very small,” Zelinsky said. “We’ve got about $2 million, we’re really in our infancy. I think Vestwell’s fees are, at least when we looked at it, we concluded they were the best we can do. Down the road when the program has more assets and greater bargaining power, will we be able to look at this again, the answer is I hope so.” 

The possibility that understanding the true nature of those account deductions may drive some savers away from MyCTSavings and to potentially open their own accounts with something like Fidelity or Vanguard, is not, necessarily a bad thing either – it’s part of the point of the program in the first place: to encourage people to save for their retirement.

“If the net result of the Connecticut program is to encourage both small employers to set up plans and encourage people to do their own IRAs, I consider that a real success,” Zelinsky said. “The problem is an awful lot of people aren’t comfortable doing that. You have to have administrative skills to do that, so we’re providing a service for people who, so far, have not learned how to save on their own. Is it possible when people learn to save on their own and they’ve got some money that they’ll make their own decisions? Yes, and I think that would be great.”

It is certainly possible that the push generated by MyCTSavings could lead to people starting their own accounts, or even small businesses deciding to start their own employer retirement accounts. 

Certainly, the federal government gave its own push to the state programs. Under President Barack Obama’s administration the federal Department of the Treasury began the myRA program, which was essentially the same thing: a federal retirement savings program people could opt into. 

In many respects, it was very similar to the state program proliferating across the country today. It was a federally backed Roth-IRA account but without the fees. The myRA program was cited by the Securities Industry and Financial Markets Association in their opposition to state retirement programs in 2015, saying it would be more effective for states to encourage people to join myRA, rather than starting their own programs.

However, President Donald Trump’s administration closed the program in 2018, citing low participation rates, just when states like California, Oregon and Connecticut were gearing up their own.

“Some of the original programs had myRA built in as part of the platform, and when the Trump administration came in to dismantle it, it kind of created a little bit of a ripple effect for some of these states to have to go back and rewrite their rules,” Yeaw said. “The people behind it were really wanting it, the myRA program was always viewed as a half step to get the states to do this, so I think it was effective for what it ultimately wanted to do.”

But in December of 2022, the federal government dropped another big incentive, a push to encourage people to save for retirement and for small businesses to create their own employer-sponsored retirement plans. 

Part of a massive omnibus package passed by Congress was the Secure Act 2.0, which investment advisor, Brian Williams, calls, “the most significant retirement legislation since ERISA in 1973,” and that act of Congress could potentially affect state-based retirement programs.

Brian Williams of Northshire Consulting, an independent investment advisory firm, has been holding forums with the Newington Chamber of Commerce streamed live on Facebook, informing businesses about the MyCTSavings program and alternatives they may want to consider in the wake of the Secure Act 2.0.

The Secure Act 2.0 awards tax credits to small businesses for starting their own retirement plans, like 401(k)s, which can be more expensive for the business owner than a program like Connecticut’s, which essentially costs them nothing. For Williams, however, the new act by Congress has leveled that playing field.

“We had Secure Act 2.0 legislation that passed in December which provides a lot of tax credits for small businesses to start their own retirement plans, so what that allows the business to do is pay for the expenses themselves and get it back in a tax credit,” Williams said. “Now the difference between that and what the state is doing, is the state is going out to business owners and saying, ‘hey we’ve got this great program and its free to you’ but what that means is they pile the expenses onto the employees.”

“When we originally passed [MyCTSavings] in 2016, which doesn’t seem like that long ago, but it is, its seven years ago at this point, there’s been a ton of competitive pressures in the 401(k) world as far as fees go. There were two major pieces of legislation, the first Secure Act in 2019 that provided a ton of tax credits, and now you had Secure Act 2.0 that passed just a month ago,” Williams said. “You have pooled employer plans, all sorts of this stuff has come on board, so I think the state’s mindset is they still think its 2016 and its not.”

Williams makes the point that the state mandate for the MyCTSavings program isn’t a mandate that employees or businesses join the program but should be seen as a mandate to provide a retirement plan of some kind, and with the new Secure Act 2.0, businesses may be able to offer traditional 401(k) plans and the upfront costs would be returned to them in the form of a tax credit.

“Other states that have done similar programs have seen an uptick in private retirement plans so it’s not all going to the state business,” Williams said. “I just know that when the state is out, that’s not necessarily the message they’re giving, they’re out there selling their product.”

Williams says that over the month of January his company has done retirement plans for a small, independent restaurant in Meriden with 25 employees, and hair salon outside of Danbury with 4 employees. “So, the idea that small businesses don’t want 401(k)s or aren’t interested in 401(k)s or its too complex, that’s all gone,” Williams said.

Pew Trusts examined the effect of state-sponsored retirement programs in California, Illinois and Oregon and found that, “In all three states with auto-IRAs, the rate of introduction of new plans, as a share of existing plans, is higher than before these states introduced the savings program.”

Essentially, the state programs incentivized businesses that did not previously offer retirement plans to begin offering them to employees. “This evidence from California, Oregon, and Illinois continues to indicate that auto-IRAs complement the private sector market for retirement plans, such as employer sponsored 401(k)s,” Pew wrote.

The Comptroller’s Office says the goal of the program remains, however, to encourage employers and employees to start retirement savings plans, regardless of which plan they choose. 

“The aim of the law and our program is to get more people saving, and businesses, in consultation with their own financial advisors who understand their interests, should choose what is best in their individual circumstances to provide for their employees,” Comptroller Scanlon said in an emailed comment. “MyCTSavings is free to employers and integrates into existing payroll processes, but employers who may wish to choose another option may always do so.”

But Williams says the state is marketing its retirement plan by comparing it to 401(k)s, which, historically, can be more costly, when the state should be comparing its own plan to other, similar IRAs. 

“It’s apples and oranges. What they really should be doing is comparing it to a regular IRA that somebody off the street can get, and you can go to Vanguard or Fidelity, Schwab and get a no-fee IRA,” Williams said. “But now with the tax credits in place, [401(k)s] are in most situations less than the state program.”

“If you look at any of the material that’s gone out from MyCTSavings, they haven’t even mentioned Secure ACT 2.0. So, how do you put yourself in the retirement business if you didn’t even mention the most significant piece of legislation? I feel like they’re pushing their own product rather than doing what’s best for employers and employees.”

Yeaw says that the biggest providers of 401(k) plans for small businesses – what are termed “micro-accounts” – are massive payroll providers like ADP and Paychex. And now with the incentives supplied by Secure Act 2.0, the prospect of opening a retirement plan for a small business “just keeps getting sweeter.”

“I think the biggest changes you’re seeing is at the federal level,” Yeaw said. “There’s been a push over the last few years by acts of congress to really push accessibility of retirement plans and they’re making it more of a ‘game on’ relative to state programs. Those are providing a lot more incentives to individual businesses to start 401(k) or other plans, so that’s been another big factor in these things.”

“A lot of that is meant to create bigger economies of scale, so those bigger financial institutions will be more likely to make a play for that business because quite frankly the unit economics don’t tend to work out the smaller the business,” Yeaw said.

And creating an economy of scale may be exactly what the Comptroller’s Office is seeking also, under a bill that has already received a public hearing before the General Assembly’s Labor and Public Employees Committee.

According to Yeaw, it is likely a very smart move as state retirement plans proliferate across the country.

If passed, Raised Bill 6552, which pertains to the the MyCTSavings program, would allow the Comptroller to enter into memorandums of understanding with other states “relating to areas of collaboration, including, but not limited to, data collection, shared program administration and financial services, pooled investment of assets, marketing and outreach support, program evaluation and research, data collection and participant privacy and any other area of collaboration.”

The legislation would give the Comptroller a broad brush to partner with other states with similar state-sponsored retirement savings programs, essentially growing the pool of assets and resources much larger. As Prof. Edward Zelinsky said earlier, the large commercial institutions aren’t much interested in servicing these small accounts, but as the pot of money grows larger, that could change. It could also give the Comptroller’s Office, and other state programs, the ability to negotiate lower fees in the future.

In written testimony submitted to the Labor and Public Employees Committee, Comptroller Scanlon said that Connecticut has already been approached by Rhode Island, Maine and Delaware looking to partner with MyCTSavings for their own state retirement programs. 

“This would shrink the program’s administrative costs by growing the asset base faster. This change would also increase the power of small states to engage in cost leveraging activities. Everyone, including workers, can benefit from such cooperative arrangements,” Scanlon wrote. “Retirement programs work best, for workers and institutions, when they achieve economies of scale. This proposal will lower costs for Connecticut families and our state government.”

“It’s actually smart,” Yeaw said. “All the newer states that have programs getting off the ground tend to be smaller states and they’re already getting the ‘no thank you’ from the bigger providers saying, ‘you’re going to have to collaborate with other preexisting programs to get off the ground.’”

“He probably should be figuring out a lead partner on these things, because I think it could be a better economic situation for both the people of Connecticut and other states to get on board a partnership like that,” Yeaw continued, saying the New Mexico is partnering with Colorado and that it’s just the beginning of interstate collaboration for retirement programs. “You’re starting to see states almost compete with each other to be lead partner with other states. Colorado and Oregon have been really vocal.”

The move to pool resources could also be a win for advertising the program, according to Zelinsky, who says Connecticut’s program has been operating on a shoe-string budget for promotion, whereas states like California were given much greater resources to work with and has grown to $423 million in assets.

“You look at us in Connecticut, we are in the infancy, we’re $2 million. We’ve not been given a lot of money to do promotion and advertising,” Zelinsky said. “It’s going to take us a long time to get to where California is.”

And it took a long time for Connecticut to even get its program off the ground, which was beset from the beginning with funding problems and changes in leadership. According to testimony by John Erlingheuser, senior associate director of advocacy for the Connecticut chapter of the AARP, a lack of enthusiasm from the previous administration under Gov. Dannel Malloy, who initially signed off on the program, also delayed its launch.

“We took a long time,” Erlingheuser said during testimony. “The previous administration was less than supportive of the program. It took a long time — a whole year plus — to get the board appointed that was originally the governing structure. Once the board was appointed there wasn’t a funding stream, so there were a lot of issues around how you got things up and functioning without a funding stream.”

Erlingheuser said the Lamont administration took the initiative to make former Comptroller Kevin Lembo director of the Connecticut Retirement Security Authority and get the program back on track, so it could finally launch – until, of course, the COVID-19 pandemic hit.

“I think it took a Kevin Lembo to step in when things were messy to straighten up the board and just give it better governance,” Yeaw said. “I give him a lot of credit for getting the program off the ground because it took longer than most other states out there.”

 Of course, nothing is ever set in stone. The success or failure of any of these state programs hinges on a number of factors, employee participation being a big one, hence the automatic enrollment. 

But with federal incentives pushing for small businesses to purchase their own employer-sponsored retirement plans, and indications that more businesses are doing just that, it could be a long road to really growing the pot and achieving the economies of scale necessary to lower the fees deducted from savers’ accounts to make the program more competitive with other IRAs. 

However, potential savers should be educated on just what those fees mean in the long run for their savings, particularly since they are being automatically enrolled in the program, even if it isn’t necessarily the greatest advertising strategy.

Despite the shoe-string outreach and advertising budget, the Comptroller’s Office has been reaching out to employers, and Comptroller Scanlon, himself, has been generating press so that people know what is coming.

“I was impressed with what [Scanlon] was saying, the energy, the priority he was giving to the program and some of the people he was bringing in from his staff to do it right,” Yeaw said. “I’m glad he’s figuring that out only a month on the job.”

**Feb 24, 2023: Numbers regarding investment losses from the expense fees have been updated to reflect the target fund portfolios and the underlying investment options**