LAST REVIEWED Jul 05 2022 11 MIN READ
By The Human Interest Team
California businesses with 5+ employees are legally required to offer a qualified retirement plan or the state-sponsored option.
The most recent deadline, in June 2022, required companies with 5+ employees to offer a qualified 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 2022, affected employers with more than five employees. This means that most California companies are now required to offer a qualified retirement plan such as a 401(k) 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. 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 46 states that have considered or passed legislation that establishes state-run retirement savings programs. So, why does California need a program like this? In short, many Californians—7.4 million workers aged 25-64—don’t have access to the most common tools to help them save for retirement. Put another way, 61% of private-sector workers aged 25-64 have no way to save for retirement through their employer, according to 2014 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 (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 and adjustable, although employees may opt-out. 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.
CalSavers is a Roth IRA program. Employee deductions are placed into a Roth IRA (although participants may re-characterize their contributions to a Traditional IRA). A Roth IRA comes with an annual contribution limit of $6,000 in 2022 ($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 can keep their CalSavers account—and the plan is designed to move with an employee throughout their working life.
Employee investment options. Unless an alternate investment is selected, all contributions made in the first 30 days are deposited to the CalSavers Money Market Fund. After that point, funds and future contributions are automatically allocated to a target-date fund based on age or expected year of retirement, or to a fund the participant chooses.
Is CalSavers mandatory for employers to register?
Enrolling in the state-sponsored program is not mandatory. However, as of June 2022, all employers in the state with at least five W-2 employees are required to offer a qualified retirement savings plan—including a 401(a), 401(k), 403(a), 403(b), 408(k), 408(p), or 457(b)—to their employees. If employers fail to offer a plan, they will face fines.
What is the deadline for employers to register with CalSavers?
Deadlines to register businesses with more than 100 employees, 50 employees, and five employees have already passed (the last one for businesses with five or more employees was in June 2022). Missed your deadline? Businesses of these sizes should register immediately to avoid any additional fees! Learn more about starting a 401(k) for your California business.
What if my company doesn’t comply with missed deadlines?
Employers who missed deadlines may face financial penalties. According to California state law, employers that fail to allow eligible employees to participate in CalSavers are subject to 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?
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 30 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.
Data from the CalSavers Retirement Savings Board show that elements of the state-run program have benefited certain small businesses and their employees. For example, in 2021, the number of active participants in CalSavers more than doubled to 218,000 total savers who were contributing a total of $187 million (excluding withdrawals and investment returns). Plus, registered employers offering the state option tripled to more than 23,000 that year.
Despite these increases, other data points suggest prevailing discrepancies:
The average contribution was just $150 per month per participant (despite a total contribution level of $16 million among active accounts per month in 2021). In comparison, participants in Human Interest 401(k) plans contribute 10% of their gross income (including employer match), on average*.
58% of funded accounts had balances of $500 or less at the end of the year (among new savers).
Plans saw an opt-out rate of about 30% among participants, which is higher than the averages of similar 401(k) plans. For example, Human Interest sees participation rates of 87% when auto-enrollment is included in 401(k) plan design*.
CalSavers is better than nothing. But it may lack the flexibility and plan design 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 2022, allows contributions up to $6,000 if you earn $129,000 or less per year ($204,000 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 California 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 education, and integration with leading payroll providers.