CalSavers vs 401(k)

Many people find themselves financially unprepared for their non-working retirement years. According to the most recent National Retirement Risk Index, nearly half of Americans age 55-59 have insufficient savings to maintain their pre-retirement standard of living.*

In response, California has recently established its own state-run retirement plan. The plan has been mandated for use by business owners who otherwise do not offer a retirement plan benefit program for their employees, such as a 401(k), SIMPLE IRA or SIMPLE 401(k).

For some companies CalSavers can make sense as a retirement saving option for both the business owner and their employees. However, as time passes and the company grows, this option may no longer be the right fit.

Now is the time for you to have a conversation with RWM Financial Group regarding this program and what it means for your business. We can help guide you through your options and help you decide what’s best for you and your employees. Here are some frequently asked questions being asked by employers like you:

What is CalSavers?

In 2016, Senate Bill 1234 was passed, requiring the state to develop a workplace retirement savings program, known as CalSavers, for private sector workers whose employers do not offer a retirement plan. State law protects employers from any liability or fiduciary responsibilities to the plan.

Who is required to implement the CalSavers program?

Employers with five or more employees who do not provide a retirement plan for their workers must register for CalSavers and facilitate employee contributions to Individual Retirement Accounts.

How will the program work for my employees?

• Contributions to their account will occur automatically from each paycheck.

• The default savings rate is 5% and an automatic increase feature that will increase their contributions by 1% each year, until it reaches 8%.

• The first $1,000 of contributions will be invested into the CalSavers Money Market Fund.

• Employees can customize their account and choose alternative savings rates and investments.

• An asset-based fee will be applied to their account to cover administrative expenses and the operating expenses of the underlying investment funds.

• Depending on their investment options, the fees will range from 0.825% to 0.92%. This means they will pay between 83 cents and 92 cents per year for every$100 in their account.

• Employees can opt out or back into the program at any time. If they leave their job, they can take the money with them or leave it in the account.

When do employers have to register for the CalSavers program?

Employers can start the program as soon as July of 2019. However, the final deadlines for employers to implement the program are as follows:

Size of Business Deadline

Over 100 employees … June 30, 2020

Over 50 employees … June 30, 2021

5 or more employees … June 30, 2022

How much work will be required of employers?

Employers are required to manage all employee census data and submit their employee contributions each pay period. You will need to assign this ongoing administrative task to someone in your organization and make sure they get trained — or do it yourself.

Do I have to use the CalSavers program?

No. Registering for the CalSavers program is just one way to fulfill the requirement that every qualified employee in California have access to a retirement plan. Businesses can also establish their own employee retirement plan, such as a 401(k) or SIMPLE IRA, or SIMPLE 401(k) to satisfy this requirement.

How RWM Financial Group Can Help

While we applaud the mission and effort behind the CalSavers program, we believe you should also consider other available retirement plan solutions that can provide your employees with more benefits and value.

Consider the following:

The CalSavers program does not allow for employers to make contributions on behalf of their employees. In a competitive labor market, this limits your flexibility and takes away your ability to offer an attractive retirement plan benefit to employees you are trying to recruit.

• The CalSavers managers will pick the investment options, which may be different from what you and a financial advisor might choose.

• Employee contributions are limited with the CalSavers program. It only allows a maximum contribution of $6,000 in 2022, compared to $20,500 for a 401(k) or $14,000 for a SIMPLE IRA or SIMPLE 401(k).

• While there is no cost to employers for participating in the CalSavers program, it does not offer the employer any tax credits, which you can get by offering a 401(k) plan. For example, starting a 401(k) plan currently allows employers up to a $500 tax credit in each of the first three years.

• Are you worried about the extra work and time commitment necessary to sponsor a workplace retirement plan such as a 401(k)? RWM Financial Group can help you review retirement plan providers who can provide very cost effective solutions that can help minimize your administrative burdens and fiduciary risk.

At RWM, we help businesses like yours create well-managed retirement plans that benefit both your employees and you as an employer. Contact us to learn more about how we develop customized solutions to help you design a 401(k) program, maintain compliance, reduce your costs, and increase employee loyalty.

*The NRRI is published by Boston College’s Center for Retirement Research.

This information is not intended as authoritative guidance or tax or legal advice. You should consult our attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.