There’s long since been a coverage gap in the retirement industry, especially when it comes to small businesses.
In fact, according to LIMRA, only four in ten small businesses offer any type of retirement benefit to employees. As a result, too many Californians are saving too little for retirement. And though stagnant wages and high cost of living contribute to this issue, the primary culprit is no job-based retirement savings vehicle.
That’s why the State of California is now requiring that small business owners must offer a retirement plan to their employees, whether they want to or not. CalSavers is a state-run retirement plan that will ensure Californian employees will have access to a retirement savings program. This is important when statistics show that Americans are 15 times more likely to save for retirement when their employer offers a retirement plan.
What is the CalSavers program?
While the state-mandated program was ultimately designed to close the coverage gap and limit the number of workers in California that don’t have access to a retirement savings plan, it was also designed to give employers a simple, cost-effective, hands-off approach to helping their employees prepare for their future retirement. Consider it a starter retirement plan that is managed by the State of California. It’s essentially a Roth IRA; enrollees under the age of 50 can save up to $6,000 a year, and those over 50 can save an additional $1,000, or up to $7,000 annually.
What are the important CalSavers deadlines?
By June 30, 2022, every business in California that has five or more employees will be required to offer some type of retirement plan. If you already offer a 401(k) or similar qualified plan, you will be exempt. If not, you can start a 401(k) or join CalSavers.
- If you have over 100 employees: You need to participate by September 30, 2020.
- If you have over 50 employees: You need to participate by June 30, 2021.
- If you have 5 or more employees: You need to participate by June 30, 2022.
What should I know before choosing CalSavers vs. a 401(k)?
Pros and cons of setting up a 401(k)
Pros
- Recruiting and retention. Especially in a tight labor market, a 401(k) makes your company more competitive to top talent. It may be the reason why a good employee doesn’t leave, or why your unicorn candidate chooses you over a different employer.
- Flexibility. A 401(k) allows employees to put money into the plan every year. You, as the employer, can choose to match contributions at a rate that works for you.
- Keep your employees on track for retirement. Employees under 50 can contribute up to $20,500 per year. Those over 50 can contribute up to $27,000 annually.
- Inclusive of high earners. CalSavers doesn’t allow “high earners” to participate. These include single filers who make more than $144,000, or joint filers making more than $214,000. This is not an issue with a company-sponsored 401(k) plan.
- Enjoy tax credits. When you set up a 401(k), you may be eligible for startup costs — up to $15,000 — for the “ordinary and necessary costs” of setting up specified retirement plans for your employees.
- Enjoy tax deductions. Plan expenses may be claimed as a business tax deduction.
- Personalized financial wellness programs. Employees receive education in the form of one-on-one, in person, and virtual meetings, webinars, and thought leadership articles
Cons
- Time. Plans can be cumbersome to set up and administer.
- Costs. There are costs for outsourcing the record-keeping, investments, and administration.
- Compliance. The rules and regulations set forth by ERISA can be complex, requiring annual compliance testing. Compliance can become a liability for businesses that don’t follow regulations.
- Quis nostrud exercitation
Conclusion
Long-term benefits that are financially beneficial, like an employer-sponsored 401(k), can really set you apart. When you offer a 401(k), you’re demonstrating that you’re willing to invest in your employees — which can help with both recruitment and retention.
As the most recognized retirement saving plan, employees are more likely to join and stay at a company that offers a 401(k), especially if the business has a vesting schedule.
Pros and cons of using CalSavers
Pros
- Ease of use. CalSavers allows you to comply with state retirement mandates in an affordable, convenient way.
- Low cost. CalSavers is free for employers. According to the CalSavers website, the only administrative cost for CalSavers is an “asset-based fee” of around 0.825 to 0.95 percent, depending on the employee’s investment choice.
- Simple. As an employer, your role is limited to uploading employee information to CalSavers and submitting employee contributions via payroll deduction.
Cons
- Employee investment options. The default investment option for the first $1,000 payroll contributions to the state retirement program is a money market fund. The subsequent contributions will be deposited in a target-date fund consistent with the participant’s birth date. While CalSavers offers investment options, its funds only represent a fraction of the open market.
- Income limits. CalSavers is a Roth IRA; if your employees earn above a certain threshold, they will not be able to participate in CalSavers.
- Low contribution limits. Even if employees max out their contribution to CalSavers, they’ll likely fall short of the amount of money needed for retirement.
- No ERISA protection for workers. 401(k) plans, on the other hand, are subject to ERISA, a federal law that requires Fiduciary oversight of retirement plans.
Conclusion
CalSavers is a very easy way to help your employees save for retirement. This program is overseen by a public board chaired by the State Treasurer. You won’t need to pay any fees to offer CalSavers, and you hold no Fiduciary liability.
What happens if an employer doesn’t participate in CalSavers?
Employers who do not offer a qualified retirement savings plan within 90 days of receiving a failure-to-comply notice will face a penalty of $250 per eligible employee if they’re unable to show good cause.
An additional penalty of $500 per eligible employee applies if you, the employer, remain non-compliant 180 days or more after being notified of failure to comply.
We Can Help
CalSavers is a good first step toward retirement savings for those who have not had the opportunity before. However, if the state is now mandating that a company has to have a retirement plan in place, it’s worth implementing a retirement plan that’s more flexible and beneficial to both the employees and the employer. A 401(k) plan allows employers to do just that.
You have more choice in the customization of your retirement plan than you may realize. If you want to learn how you can meet the requirement — offer more while paying less — call our San Ramon, CA office at (925) 314-8500 or fill out the form below. We look forward to hearing from you.
