CalSavers Retirement Plan: What Is It & How Does It Relate to My Business?

What is CalSavers?  CalSavers is a mandatory retirement savings program (like an IRA or 401k) run by the state of California for private-sector (and some non-profit sector) workers of California.

California state law requires employers to either offer their own retirement plan, or now, register to facilitate CalSavers. If you are a California business owner, who does not offer your employees a retirement package, this program, which launched July 1, allows employees to take a payroll deduction to contribute to a state-run IRA program.

Wait, but I am just a small business owner!  Don’t worry, employers do not have to sign up right away - you have until June 2020 if you have 100 or more employees, or until June 2022 if you are a small employer, with between 5 and 49 employees.

Why is California doing this?  The program is designed to ensure Californians have a path to financial security in retirement by providing a simple, portable, low-cost way for workers to invest in their futures.  CalSavers is designed for the estimated 7.5 million working Californians who do not have an employer-sponsored retirement program. It allows these employees to make a voluntary contribution, starting with at least 1% of their wages and rising automatically to 8% unless they opt out, to a personal IRA account.

If an employee moves to another job, their CalSavers goes with them. The former employer would simply need to manage payroll deductions, a process most employers are already very familiar with.

Another huge benefit is that the CalSavers program has low fees. The projected fees start at less than 1% and over time are expected to decline to as low as 0.3%. This is significantly less than most private sector plans available for small employers, which have fees between 1 and 5%, averaging more than 2%. Lower fees translate to higher savings for your employees.

Covered employees are automatically enrolled in CalSavers, and the state will contact employees directly to make them aware of the program and inform them of their ability to opt-out or customize their contributions.

Currently, the CalSavers Program uses after-tax Roth IRAs, but is working on adding a Traditional IRA choice in late 2019 or early 2020. For 2019, the contribution limit is $6,000 for those under age 50 and $7,000 for those ages 50 and over. Note that this limit applies to all of an individual’s IRAs in aggregate – including a CalSavers account. Standard Roth IRA distribution rules apply.

Unless an employee selects another investment option, the first $1,000 in contributions will be invested in the CalSavers Money Market Fund and subsequent contributions will be invested in a target retirement date fund based on the individual’s age. Employees can decide at any time whether to keep their investments in these funds or choose from a menu of other investment options.

Sources:  

U.S. Treasurer
Sacramento Bee
Nat’l Asso. of Plan Advisors