What is the CalSavers law?
In theory, yes CalSavers is a good thing. This new law is meant to provide employees a convenient way to save for retirement. As with any government run program, there are good things and areas for CalSavers to improve.
Established by California’s Employment Development Department, CalSavers is a retirement savings program created for private sector workers whose employers do not offer a retirement plan. This program provides employers an easy way to help their employees save for retirement.
There is no cost to the employer, no fiduciary liability, and the employer responsibilities are minimal. Employers with five or more employees must participate in CalSavers if they have not already established their own retirement planfor their employees.
Eligibility and compliance deadlines are based upon the size of your company and the average number of employees you report to the Employment Development Department throughout the year. Companies that have more than 100 employees were required to provide their employees CalSavers on September 30, 2020, unless otherwise exempt. Companies with more than 50 employees had until June 30, 2021 to comply. On June 30, 2022, employers with five or more employees will be required to offer CalSavers, or provide employees with a company sponsored retirement plan, such as a 401(k), 403(b), SEP IRA or Simple IRA. Failure to comply within 90 days will result in a $250 fine per employee. After 180 days, non-compliant firms are fined an additional $500 per employee.
Is CalSavers a good thing?.
Here’s What We Like:
CalSavers handles a lot of the communications and maintenance, making things easy on employers. Employers who enroll in CalSavers are not responsible for managing any part of the plan, communicating with employees about the plan, enrolling employees, processing distributions, or managing employee changes or account maintenance. CalSavers manages all of this. Employers are responsible for registering for CalSavers, providing basic employee roster information for eligible employees, and facilitating appropriate employee contributions during the usual payroll process. There are no employer fees to participate in the program.
Employees are responsible for opting in or out of the program and selecting their investments. If they do nothing, employees are automatically enrolled in the program at 5% of their gross pay. There is also an automatic increase feature that increases the employee’s savings rate by 1% annually until the employee’s savings rate reaches 8%, unless employees opt out of or modify the increase. Be aware that the automatic enrollment might take some employees by surprise, and some might not be willing or able to have 5% of their pay deducted to fund their future retirement. The 1% annual increase may also come as a surprise, as some employees might want to keep their contribution amounts level.
Limitations to CalSavers:
CalSavers accounts are Roth IRAs. Those making over $140,000 individually, or $208,000 as a married couple filing jointly are ineligible to participate in CalSavers. This is driven by IRS rules on limits on a Roth IRA. If your company employs high earners – or plans to in the future – a 401(k) plan may be a better option for your company.1 Beyond the high earner issue, there are other factors to consider when comparing the CalSaver program and a more traditional 401(k) plan:
While there are several nice features about CalSavers, there are definitely some significant limitations to the program as well. In our opinion, CalSavers is a good option for employers who are comfortable with the limited flexibility to the design of their plan, those comfortable investing on their own using limited investment options, and those who do not employ high income earners. A traditional 401(k) is better suited for employers who want to offer their employees a chance to save more for retirement in a program with more flexibility with investment options and other plan design features (such as a company match), while still providing high earning employees an important benefit. Yes, employers will assume fiduciary liability in offering a 401(k) plan, whereas they won’t if they elect to register with CalSavers. However, much of the fiduciary liability can be mitigated by working with a financial advisor willing to act as a co-fiduciary.
If you would like to learn more about employer-sponsored retirement plans, including 401(k)s, please contact us at info@polariswealth.com.
1 CalSavers offers savers the option to recharacterize their contributions to a traditional IRA.
