CalSavers – Important Information for California Small Businesses

By David K. MacLeod, CFP, CFA

A new California law is going into effect which will soon require employers with 5 or more employees to offer a retirement plan.

For employers who don’t offer a traditional retirement savings plan, such as a 401(k), California is offering a new government-sponsored plan called CalSavers.

It’s estimated that 7.5 million Californians who don’t participate in an employer-sponsored retirement plan are eligible for CalSavers. If you’re an employer or employee of one of the 250,000 companies who don’t offer a retirement plan, here’s a list of frequently asked questions about CalSavers.

What is CalSavers?

CalSavers is a state-sponsored retirement savings program for California workers whose employers don’t offer a retirement plan such as a 401(k). Employees can contribute via payroll deductions to an IRA account in their name.

As an employer, do i have to offer calsavers?

Employers in California who do not already offer a retirement savings plan must offer CalSavers or face fines of $750 per employee. The deadline is based on company size:

What’s in it for Employers?

Employers who don’t offer a retirement plan tend to be put off by the administrative hassle, cost, and fiduciary liability. CalSavers is free to employers and there’s no employer liability because the state is the plan sponsor. Employers are mainly responsible for handling the contributions through payroll deductions and maintaining the employee census.

My Employer started offering calsavers, now what?

You have 3 options:

Do Nothing

If you do nothing, you will start making default contributions equal to 5% of your gross pay. The first $1,000 will be automatically invested in a money market fund. After that, additional contributions will be invested in a target retirement fund based on your age.

Customize

You can invest your account into any of the available investment options as you choose (more details below).

Opt-Out

Employees are not required to participate and may elect to opt out of participating at any time.

One important note about a key plan responsibility. It is up to the employee to determine what their maximum contribution amount is. There are also income limits to be able to contribute to a Roth IRA and it’s up to the employee to make sure they are eligible to contribute.

In 2021, individuals under age 50 can contribute a total of $6,000 for the year, or $7,000 for those over 50.  However, Roth IRA contributions are reduced if your income (MAGI) is more than $125,000 (filing single) / $198,000 (married filing joint). No contribution is allowed if your income is more than $140,000 (filing single) / $208,000 (married filing joint).

What are the available investment options?

There are several types of mutual funds you can invest in, including:

·     Stock Funds

·     Bond Funds

·     Money Market Funds

·     Sustainable Balanced Fund

·     Target Retirement Funds

The target retirement funds are broadly diversified fund of funds invested in stocks and bonds, managed by State Street. The allocation is based on an average person who targets retiring in a specific year. For example, CalSavers Target Retirement 2030 is aimed at an employee who plans to retire around 2030.

How much does CalSavers cost?

There is no direct cost to the employer. However, there are some administrative duties the employer is responsible for.

Employees bear all the direct costs of the plan, including administration fees and fund fees. The fees are applied directly to each employee account. The fee is an asset-based fee of approximately 0.8% – 1.0% per year depending on investment selections.

What other options do I have as an employer?

CalSavers is a relatively simple and low-cost plan for employers. However, employers may want to consider starting another retirement savings plan that meets your needs. Some plans are lower cost than CalSavers to employees.

Many plans, including a 401(k), offer much higher maximum annual contribution amounts that are tax-deductible. Individuals can put up to $19,500 into their 401(k) in 2021, plus an additional catch-up contribution of $6,500 for those over age 50. Including employer contributions, a total of $64,500 can be added to a 401(k) account in 2021 for a worker over age 50 (subject to plan testing and other possible limits).

An excellent retirement plan is an employee benefit that can help attract and keep good employees.

Eclectic Associates is a fee-only fiduciary financial advisory firm in Fullerton, California. Feel free to call us to discuss your retirement savings plan. We would be happy to talk to you to see if we can help with your situation.

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