Simple Guide to CalSavers for Business Owners

, ,

The State of California requires that all businesses with 5 or more employees offer a retirement savings program. When examining the retirement-readiness of CA residents it became clear  that many people were not saving enough for retirement. Because of this, a whole generation of retirees was facing the very real possibility of finding themselves dependent on State-funded programs… which would be very expensive for the government.  So, to solve the problem, California now requires all employers with 5 or more employees to offer retirement savings to their employees.  Employers and business owners can choose to default to the California state-run CalSavers program or, they can offer a retirement savings plan of their own. 

There are a number of reasons why business owners should consider setting up their own 401k plan rather than relying on CalSavers. In this article, we review what CalSavers offers, what a custom plan can offer, and what the benefits of a custom 401k retirement savings plan are to both employers and employees. 

What is CalSavers and what does it offer?

The CA EDD describes CalSavers as: 

“a retirement savings program for private sector workers whose employers do not offer a retirement plan. This program gives employers an easy way to help their employees save for retirement, with no employer fees, no fiduciary liability, and minimal employer responsibilities.” The details are that CalSavers offers a basic Roth IRA to help employees build their retirement savings. If you are not familiar with Roth IRAs, they allow employees to save after tax dollars. 

Roth IRAs have lower contribution limits, limited investments, and limited tax advantages. 

You can withdraw the money from a Roth IRA without having to pay any taxes on it because you paid taxes on that income before contributing it to the IRA. 

The contribution limit for a Roth IRA is $$6,000 per year, and the income limit is $144,000 for single people or $214,000 for married filing jointly per year (as of 2022). This means that if you make more than $144,000 per year, you are not eligible to contribute to a Roth IRA. 

There are also limits on what you can invest in with a Roth IRA. You are limited to investing in stocks, bonds, and mutual funds. 

While a Roth IRA can be a great way to save for your retirement, if you are looking for a retirement savings plan with more flexible investment options and higher contribution limits, you will want to consider setting up a 401k for your business instead. 

First and foremost, a custom 401k plan can be designed to specifically meet the needs of your business and your employees. This means that it can be tailored to maximize both employee retention and to encourage and reward retirement savings.

Additionally, setting up a custom 401k retirement savings plan can have tax benefits for Business Owners. CalSavers does not offer any tax breaks for businesses, meaning that you could be missing out on significant savings. 

If you are not familiar with the difference between a Roth IRA and an employer-sponsored 401k: 

A 401k plan is a retirement savings plan that allows employees to save money for their retirement with pre-tax dollars, which means that the income they choose to invest in the plan is not taxed until it is withdrawn from the plan after retirement. 

Setting up a 401k retirement savings plan for your business has a number of tax advantages that can save you money in the long run. 

One of the biggest benefits is that contributions to the plan are made with pre-tax dollars. This means that you do not have to pay taxes on the money until it is withdrawn from the account. This allows employees to save more money for their retirement. 

Another advantage of 401ks is that they offer businesses a number of tax breaks. For example, businesses can deduct their contributions to the plan from their taxable income, and they can also deduct employee contributions. This can save business owners a significant amount of money on their taxes each year. 

It’s no secret that good employees are hard to find and harder to keep. 

One of the best ways to retain key employees is by offering them a good benefits package. And one of the most valuable benefits you can offer your employees is a 401k retirement savings plan. Offering a 401k plan is a great way to show your employees that you value them and want them to stay with the company for years to come. 

If CalSavers is not the right solution for my business, what do I have to do to exempt my business from the requirement?

Business owners must have a retirement plan in place as of the mandatory participation date. This may mean a 401(k) plan, a 403(b) plan, a SEP or SIMPLE plan, or a multiple employer (union) plan. Want to know what these terms mean? Check out our blog on simplifying the retirement savings jargon here. 

Even if you set up your own 401k employers must still register with CalSavers to certify their exemption. Visit: https://employer.calsavers.com and choose  “I need to exempt my business” from the drop-down menu. You will need your federal EIN or TIN and an access code provided on the notice sent to you from CalSavers (can’t find it or didn’t get one? Call (855) 650-6916).   

Setting up a 401k retirement savings plan for your business is a great way to save money on taxes and provide your employees with a valuable benefit. If you are considering CalSavers for your retirement savings plan, be sure to weigh the pros and cons carefully before making a decision.

This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your 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.

How Much Do I Need to Save For Retirement?

, ,

It used to be that when you thought of someone retired you’d imagine them sitting in a rocking chair knitting, maybe with a blanket across their knees. These days, most of us like to imagine an active retirement, filled with travel and adventure. Whether you plan to retire at 62 or at 82, the post-work-years can be a time to live life to the fullest.

If you imagine your retirement paddling around Lake Como or hiking the Alps, you’ll need to put some things in place starting right about now to afford that kind of lifestyle.

Because employees change jobs so often, the pension structures that used to support retirees (in combination with Social Security benefits) can no longer be relied upon to the extent they were in the past. The traditional sources for post-work income in the form of social security and pensions are less robust today than they were say, 30 years ago.  That, in combination with longer life spans and the expectation of good health well into your 70s (at least!) means you’re going to need additional income to support your lifestyle in retirement. By most estimates, you’ll need between 60% and 100% of your current income in order to keep up with your current lifestyle in retirement.

Setting up retirement savings now is key to a comfortable retirement

Adults who are in their 40s, or 50s now can’t bank on Social Security to fund their retirement.  At the time of this article’s writing, Social Security is estimated to cover only about a third of the current retiree’s income and that number will continue to dwindle. In fact, according to the Social Security website by 2037 benefits will be exhausted. (source: https://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html)

Because of inflation the numbers associated with maintaining your current income levels might surprise you (and not necessarily in a good way).  At an average inflation rate of 3%, the cost of living would double in 24 years. So, if you are 40 years old today and you make $80,000/year, you’ll need to be bringing in $160,000 when you’re 64 and beyond. 

You’ll also want to factor in increased medical costs in retirement. Falls and unforeseen illnesses such as stroke or heart attack can send medical bills soaring. 

Whether you imagine a modest or a luxurious retirement the numbers point to the need to save now to prepare for your later years. If you do want to travel and have luxury experiences, well, you’re going to need even more money. For entertainment purposes only, let’s run some numbers to estimate what a person who makes a significant income currently would need to put away to meet their retirement goals. (not for financial planning purposes, for illustration only) 

How Much Would You Need for a Luxurious Retirement?

For the sake of this calculation, let’s assume you’ll need 85% of your current income to retire in style. 

  1. If you are currently making $140,000 and have 20 years until retirement, you’ll multiply your income by two: $140,000 x 2 = $280,000 this is assuming about a 2% inflation. 
  2. Since we chose 85%, now we’ll multiply the sum by that number: $280,000 x .85 = $238,000
  3. Now subtract your social security benefits SS.GOV CALCULATOR (we got $35K) $203,000 (this is questionable since the previous reference states the funds will be exhausted)
  4. Now multiply that total by 20 (to find amount of money you would need to last you if you live 30 years) = $406,000
  5. Take all your savings and investments and multiply it by 5% (since we’re looking at a 20 year timeline)  $3,000,000 x 5% = $1,500,000
  6. In this scenario, you will need an additional: $1,094,000
  7. Assuming an 8% annual return, divide that number by 50. So you’ll want to set aside: $22,000.00 a year

Calculator based on tables linked here: 

As with any online calculator, this is a rough estimate and should not be construed as financial guidance.  Speak to your financial planner to better understand your goals. 

How Else Can You Prepare for Retirement?

While there are pensions, social security and there may be unforeseen inheritances, relying on government support will not lead to the action-packed retirement outlined at the beginning of this article. The good news is the earlier you start saving the better because compounding interest really adds up over time. 

Using resources like 401k retirement savings plans, Defined Benefit plans, and other tax-deferred retirement options can help put your funds to work for you. 

Did you know: If someone starts investing at 25 vs 35 those 10 years can yield nearly triple the savings?!  As with all investments, there are no guarantees any investment will provide the same results as described or experienced by someone else.

Taking the time to discuss your goals with your financial planner can help create clarity around how much money you should set aside and what tools are best for your unique situation.  With good planning and forethought, you can set up the right structures to support your financial and retirement goals.

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.

Five Design Features Agricultural Companies Worth Considering in a 401(k) Plan

,

As a business owner in the agricultural sector, you may be considering starting a retirement plan for your employees, or you may already have a plan in place that needs some updating. From technology to employee education, there are particular challenges agricultural companies face when designing and communicating a 401(k) plan. We’ll share our top five features to consider when creating or updating your retirement plan.

#1 Adopt a Safe Harbor Provision

If you already have a 401(k) and matching program or are designing your plan for the first time, adding a safe harbor provision may be a critical component.

Companies with a traditional 401(k) plan must perform annual nondiscrimination testing to remain compliant and ensure every employee can benefit from a plan fairly. These tests measure a plan’s participation, contributions, and other factors. For example, suppose more highly compensated employees participate in your plan than lower-paid employees. In that case, it can result in an imbalance in the plan’s assets or a “top-heavy” plan, which the IRS considers is favoring highly compensated employees.

However, the nondiscrimination calculations can also make it difficult for a highly compensated employee, such as an executive or owner, to max out their annual 401(k) contributions. This can quickly become a common scenario and challenge among small agricultural companies that consist of owners and a few farmworkers with significant differences in income.

If this is your situation, you can avoid a top-heavy plan and annual nondiscrimination testing by adopting a safe harbor provision in your 401(k) plan. In a safe harbor plan, employers contribute to an employee plan through matching or other contributions. Matches, in particular, incentivize more employees to participate and save for retirement, and the IRS offers the benefit of “safe harbor” from annual testing. Consult with a retirement plan professional to determine if this would be suitable for your company.

#2 Establish an Investment Committee

Managing a 401(k) program comes with specific requirements and rules from the IRS, Department of Labor, and Employee Retirement Income Security Act (ERISA). Plan administrators have the fiduciary responsibility to oversee a plan, review that investments are diversified and fees are reasonable, and share plan details with employees, among other duties.

It’s important to establish an investment committee so you can stay up-to-date with your plan and regulations and act in your employees’ best interests. A committee may look different from company to company, consisting of executives, HR representatives, a third-party retirement plan professional, or a combination of internal and external teams. If you’re a larger company with several different job levels, you may even consider appointing employee delegates representing the various employees you serve.

#3 Share Plan Information in Multiple Languages

To promote your plan’s success, your staff will need to understand its features and guidelines clearly. It can be challenging to do this if the information, disclosures, and jargon are not in your employees’ primary language.

To facilitate a comprehensive understanding, ensure you’re providing materials and communicating presentations in multiple languages, as applicable to your employees’ needs. While this may seem like an obvious detail, it’s a common mistake we see in the agricultural sector, which overlooks the diverse makeup of its farmworkers and their ability to make investment decisions and plan for retirement.

#4 Use Technology

Another typical detail that’s often missing from agricultural retirement planning for employees is the use of technology. It can be a challenge if most employees, including the owners and managers, work on a farm and do not require a computer to perform their daily tasks.

However, even small steps that leverage technology can be significant in your retirement plan’s effectiveness and ensure you’re meeting your requirements if you’re the plan administrator. For example, it’s harder to walk participants through the plan’s details, disclosures, and guidelines and offer to print essential documents without access to a computer.

At the minimum, we encourage you to set up a workstation where your employees can securely use a computer, view their statements, and print the resources they need.

#5 Provide Employee Education

When you’re managing day-to-day operations, a sprawling worksite, and several groups of employees, retirement plan education can quickly go on the back burner on your list of priorities. However, as a plan administrator, you’re required by law to meet specific compliance guidelines—one of which is providing employee education to help inform investment decisions.

The positive results of education can help increase your plan’s participation and employee loyalty for employees who feel supported, engaged, and secure with their retirement benefits. However, overlooking this key area can result in legal action by your employees, increased risk to your organization, and expensive plan corrections.

Train plan fiduciaries or work with a company specializing in retirement plans and administration to create an employee education campaign that fits your agricultural business and employee needs in an efficient and compliant way.

How RWM Financial Group Can Help

We’re aware of the challenges agricultural companies face daily and how operations could affect the effectiveness of an employee retirement plan.

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.

Some of the Top Mistakes Employers Make When Building a Retirement Plan

,

As an employer, offering a retirement plan is one way to help your employees realize their post-career goals after their years of hard work. When you’re designing your retirement plan, there are key areas to be aware of based on your entity type, such as governmental agencies and non-governmental businesses in both non-tribal and tribal organizations. If you’re unaware of these various factors and differences, you could face administrative and legal challenges.

We’ll share the common—and sometimes costly—mistakes we’ve encountered working with these different types of businesses and explain how you can seek to avoid similar challenges.

Mistake # 1 Not Discussing Your Goals and Needs

Many businesses elect to work with a third-party professional who specializes in retirement plan design and administration. However, the partnership can pose problems when the third party offers a standard prototype design without fully understanding your business type and goals. It’s critical to interview potential third parties to ensure they are well-versed in tailoring a plan to your organization. Ask them questions and discuss which features or strategies are appropriate as you’re establishing your company’s retirement plan.

For example, we frequently come across businesses offering a 401(k) matching program that have not yet adopted a safe harbor provision. There are qualifying factors, but the safe harbor provision helps you maintain compliance and avoid the expense of annual nondiscrimination testing required by the IRS. Unfortunately, many businesses are not made aware of this option and the cost savings available.

Mistake # 2 Setting Up the Wrong Type of Plan for Your Business

Every entity that sponsors an employee retirement plan must follow specific guidelines under various governing boards such as the IRS and the Employee Retirement Income Security Act (ERISA). The type of retirement plan you establish is essential to remaining compliant while not taking on unnecessary risks or costs. However, if you are unaware of the key differences, you may find yourself in a plan that’s unsuitable or costly to your business. Let’s look at a couple of examples.

  • Non-ERISA Plans for Governmental Agencies. It’s critical to know that on the governmental side for non-tribal and tribal agencies, you may be eligible for a non-ERISA plan, excusing you from the requirements found in a traditional ERISA plan. However, once you have filed a standard ERISA plan with the IRS, you cannot reverse it. This can be a damaging revelation for an agency that has implemented a traditional plan and unnecessarily opened itself up to Department of Labor audits and ERISA requirements.

  • 457 Deferred Compensation Plans. The same situation occurs when assumptions are made and a tribal government establishes a 457 plan, committing to its guidelines and associated administrative costs. In traditional, non-tribal governments, a 457 may be appropriate; however, tribal governments, unrecognized under 457 regulations, are usually best suited with a non-ERISA 401(k). In this case, it’s challenging for a tribal government to terminate a 457 plan, which requires lengthy IRS approvals.

Mistake #3 Not Using Technology

Sometimes companies set up a retirement plan without a clear strategy for leveraging technology.

As a plan sponsor, you have a legal obligation to ensure your employees adequately understand the plan’s details. Technology can help to simplify this area. For example, if you have a payroll site where employees can view and print their statements, you may consider adding your retirement plan disclosures, forms, and other resources. This way, you’ll stay compliant and reduce your fiduciary risk while giving employees a central location for important retirement information.

When employees feel more informed and engaged in their retirement benefits, we’ve found they’re more inclined to participate and take an active role in their financial future. And technology and access can be significant factors in helping them pursue their goals.

Mistake #4 Not Providing Employee Education

It can be difficult to coordinate schedules and carve out an hour for your company’s retirement plan education. However, not providing employee education can have long-term consequences.

As we’ve mentioned, providing employee education is part of your fiduciary responsibility as a plan administrator. Employees should be aware of the plan’s details and have an opportunity to ask questions and learn about plan updates, economic and business news, and general investment planning. In extreme cases, you could violate your duties and be at risk for employee litigation in the future by not providing suitable educational opportunities.

Whether through technology or group meetings, we encourage you to establish a retirement plan strategy that consistently promotes employee education. You may also think about how your education needs to shift based on your audience—for example, when speaking to executives versus frontline employees.

We do this for companies by taking advantage of regularly scheduled team meetings or trainings and simply dedicating a few minutes to the retirement plan and employee questions.

Mistake #5 Not Establishing an Investment Committee

As you can see, you must stay up-to-date on the various administrative duties and evolving regulations regarding your company’s retirement plan—and establishing an investment committee can be the determining factor in meeting those needs.

Your investment committee will be the fiduciary body responsible for managing and updating your plan, ensuring investments are appropriately diversified and fund fees are reasonable, and ultimately acting in your employees’ best interests.

When forming a committee, consider who can effectively represent your employees and inform their needs. For example, you may find a group of executives, HR staff, and a third-party partner are sufficient for your company. In contrast, another company may also appoint employee delegates based on their various employee subsets for additional accountability.

Creating a Strong Foundation

There are many moving parts when designing, implementing, and administering a retirement plan. However, when you focus on the key areas in your initial design or partner with a professional specializing in retirement plans and administration, you can strive to avoid the common challenges and unnecessary costs while helping your employees succeed.

At RWM Financial Group, we help commercial businesses and governmental agencies design and oversee well-managed retirement plans in non-tribal and tribal organizations. Learn more about building a custom, cost-effective strategy that is compliant and promotes success for you and your employees.

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