LAST REVIEWED Apr 23 2021 11 MIN READ
By The Human Interest Team
It’s now mandatory for California businesses to offer either a qualified retirement plan or state-sponsored option.
By the next deadline in June 2022, companies with 5+ employees must offer a plan or face fines.
But is CalSavers your best choice? Learn how a 401(k) plan may outperform the state-provided IRA option.
If you’re a California business owner, you've probably heard about CalSavers. The most recent registration deadline of the program, in June 2021, affected employers with more than 50 employees.
As a refresher, California has implemented a state retirement mandate that requires businesses that employ five or more employees to offer a qualified retirement plan or register with the state option, CalSavers.
The goal of CalSavers is to help ensure Californian workers have a path to financial security in retirement. But is it the easiest, most cost-effective way for them to save over the long-term? Let’s review the purpose of CalSavers and how it compares to other retirement savings options.
What is CalSavers? California’s New Retirement Savings Program
CalSavers, formerly known as Secure Choice, is California’s retirement savings program for the millions of private-sector workers who don’t currently have a way to save for retirement at work. CalSavers stipulates that employers must offer a retirement savings plan—AND, if they fail to offer one of their own, they must offer their employees CalSavers, the state-operated retirement savings plan (or else face fines). The plan has a strong focus on small businesses, focusing on employers with five or more employees.
California is one of more than 30 states to have considered or passed legislation regarding state-run retirement savings programs. So, why does California (and other states) need a program like this? In short, because so many Californians—7.4 million workers aged 25-64, to be specific—don’t have access to the most common tools to help them save for retirement. Put another way, 61% of private sector workers have no way to save for retirement through their employer, according to data from the University of California, Berkeley’s Labor Center:
How does the CalSavers program work?
CalSavers provides employers a way to set up an Individual Retirement Account, or IRA, for each eligible employee. While many retirement savings plans offer more flexibility, CalSavers mandates that plans use default features unless otherwise specified:
Employee payroll deductions are automatic but adjustable—even opt-outable. Employee deductions are automatically set to 5% of an employee’s gross pay (similar to other state retirement plans). And employees can adjust their contributions setting to a higher or lower percentage of their pay. However, employees can opt-out of the state retirement savings program (though they have to re-opt out every two years).
CalSavers is a Roth IRA program. Employee deductions are placed into a Roth IRA. A Roth IRA comes with an annual contribution limit: in 2021, this is $6,000if under age 50 or $7,000 if age 50 or older. High-earning employees are subject to a reduced contribution limit.
CalSavers is portable. If an employee changes jobs, they keep their CalSavers account. It’s a portable plan designed to move with the employee throughout their working life.
Employee investment options. The default investment option for the first $1,000 payroll contributions to the state retirement program is a money market fund and the subsequent contributions will be deposited in a target-date fund consistent with your birth date. A few other investment options exist, as well.
There is a better way to save for retirement than CalSavers, find out how, download Human Interest Vs. CalSavers: What Retirement Plan is Right For My Company?
Is CalSavers mandatory for employers to register?
While enrolling in CalSavers is NOT mandatory, all employers in the state with at least five W-2 employees MUST offer a qualified retirement savings plan* to their employees. If employers fail to offer a plan, they will face fines. CalSavers is rolling out slowly over three years, and you can register at any time before the appropriate deadline.
What is the deadline for employers to register with CalSavers?
Deadlines to register businesses with more than 100 employees AND 50 employees have already passed. (Businesses of these sizes should register immediately to avoid any additional fees!)
Upcoming CalSavers registration deadlines depend on company size:
[PASSED] June 30, 2021 – employers with >50 employees
June 30, 2022 – employers with 5+ employees
*A qualified retirement plan includes a 401(a), 401(k), 403(a), 403(b), 408(k), 408(p), or 457(b).
What if my employer doesn’t comply?
Employers who don’t offer a plan by the deadline may face financial penalties. According to Unemployment Code Section 1088.9(b), each eligible employer that, without good cause, fails to allow its eligible employees to participate in CalSavers, on or before 90 days after service of notice of its failure to comply, must pay a penalty of $250 per eligible employee if noncompliance extends 90 days or more after the notice. If found to be in non-compliance 180 days or more after the notice, the employer is responsible for an additional penalty of $500 per eligible employee.
What are my CalSavers investment options?
The CalSavers program is an automatic enrollment payroll deduction IRA that offers a variety of investment options. Unless participants select otherwise, initial contributions are automatically invested in the CalSavers Money Market Fund. A money market fund invests in low-risk investments such as Treasury securities and often emphasizes safety over profits.
After thirty days, contributions are allocated to a CalSavers Target Retirement Fund based on age and other factors. Participants can also elect to invest in other investment options, such as:
An environmental, social, and governance fund that invests in equity securities of global companies with sustainable business practices
A core bond fund composed of the U.S. investment-grade bond market
Global equity funds that invest in an index of domestic and foreign equity markets
A money market fund that aims to preserve capital and invest in dollar-denominated securities
Low-cost 401(k) with transparent pricing
Sign up for an affordable and easy-to-manage 401(k)
What are the Pros and Cons of CalSavers for Employers?
The argument for CalSavers—or any state-mandated retirement plan—is that it improves accessibility. However, it’s still up in the air whether state-mandated retirement plans have radically changed the retirement benefits landscape. So far, results have been mixed. A 2021 study from the National Bureau of Economic Research found that, while OregonSaves (a similar program to CalSavers) generated savings for more than 67,000 participants through April 2020, the average account balance was only $754. As this suggests, it may be too early to determine if state-mandated retirement programs are encouraging individuals to save more for retirement.
CalSavers is better than nothing. But it lacks the flexibility and options that your employees deserve:
While CalSavers offers investment options, its funds only represent a fraction of the open market.
CalSavers charges participants between 0.825% to 0.95% in asset-based fees.
CalSavers offers a Roth IRA option, which for 2021, allows contributions up to $6,000 if you earn $125,000 or less per year ($198,000 if married filing jointly). You can also add catch-up contributions of $1,000 more—up to $7,000 in total—if you are age 50 or older.
Is CalSavers the only option for employers?
No. While CalSavers is an affordable, convenient way to handle retirement for your employees, it’s important to know that you have other options. There are many retirement providers out there, new and old, who offer a range of products, including retirement savings plans such as IRAs, 401(k)s, defined benefit pensions, and more. However, only a few retirement plans are custom-built around the needs of small-to-medium businesses.
As an employer, you want to offer your employees tools that help them save for their future. Before deciding what kind of coverage you want to offer your employees, it’s important to weigh your options and understand your needs.
Finding the right retirement plan for your company
Two of the most common plans are IRAs and 401(k)s. To date, IRAs have been available to anyone through a bank or financial institution, but increasingly, through state-mandated programs like CalSavers, they’re being offered through employers. However, compared to an IRA, a typical 401(k):
Can let you save more money each year
Offers contributions that could reduce your taxable income (since contributions are made pre-tax)
Has no eligibility restrictions in terms of household income
May incur tax benefits for both employees and employers
Read more about the differences between an IRA and a 401(k).
The CalSavers program is just one way to comply with state retirement mandates without having to make expensive contributions. However, it’s important to shop around and research all of your options to make the best financial choice for your and your employees.
Want to explore the advantages of offering your employees a 401(k) benefit instead of the state retirement plan? Get started today.
The Human Interest Team
We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.