Written by: Taylor Boyd, Partner at Burnham Gibson Wealth Advisors
The first step to any retirement plan is to save; the goal is to save for the day that you can sleep in and hang up the work clothes. A recent study sadly found that nearly 7.4 million California private sector employees, ages 25 to 64, don’t have access to a workplace retirement plan. A workplace retirement plan is the easiest vehicle for employees to save for retirement. The California State Treasurer has taken notice of this struggle and created the CalSavers plan. The CalSavers plan is an easy, portable, and a simple way for employees to save directly through salary deferral. The plan is optional, but compliance with new law SB-1234 is not. The law states that employees must either enroll into the CalSavers plan or offer their own workplace retirement plan by June 30, 2020. Employers are left to decide which option is best; create my own plan or jump into CalSavers. The answer depends on what the employer is looking to accomplish.
What is CalSavers?
Although the CalSavers plan looks simple, there are some parts that can become complex. Let’s highlight some of the major plan features of the CalSavers program.
- Eligibility: Age 18 and older with $1 or more of earned income in a calendar year. Includes any employee working in California regardless of where the company is located.
- Payroll Deductions: Withheld as Roth deductions from participant paychecks. Participants can opt-out or choose deduction amounts up to 100% of pay up to the 2019 IRA limit of $6,000 ($7,000 if age 50 or older).
- Auto-Enrollment & Auto-Escalation: Auto-Enrollment begins at 5% of income. Auto-Escalation increases 1% per year up to 8% of income.
- Investments: First $1,000 invested into a Money Market Fund. Contributions over $1,000 default into Target Date Funds. Bond, Global Equity and Sustainable Balanced Funds also offered.
For the employer there are no hard dollar costs. However, the employer must register the business in the CalSavers program and upload an employee census. Employers will be responsible for facilitating contributions for enrolled participants. Employers will be responsible for uploading new employees into the CalSavers system, and CalSavers will communicate on their behalf. One key element to the entire CalSavers plan is the auto-enroll feature. According to AARP, workers are 15 times more likely to be on a path to retirement security when there is automatic enrollment for payroll deductions. If no action is taken for 30 days the employee will be automatically enrolled. At that time employees will begin payroll deductions of 5%. Employees are allowed to change the deferral amount at any time. Employees can get their funds back if they would like to opt out, but they will have to work directly with CalSavers.
When should an employer use CalSavers?
CalSavers is a good program and a step in the right direction of helping employers reach retirement readiness. The unique makeup of CalSavers can be ideal for an employer with tight cash flow, by alleviating “out of pocket” retirement plan expenses. Many employers have been forced to prioritize other capital expenses over adopting a workplace retirement plan. The CalSavers program largely decreases the fiduciary liability associated with most retirement plans. There have been employers that have shied away from offering a retirement plan due to lawsuits; however the CalSavers program diminishes liability. The state wanted to ensure the benefits were portable so the employee can easily transfer their account from employer to employer. Unlike most 401(k) plans, the CalSavers employee account is portable to employer to employer. If an employer’s workforce has a high turnover rate, the CalSavers program may be an ideal solution.
When should an employer create their own plan?
For many years employers have been offering a workplace retirement program, will CalSavers change that? No, CalSavers hopes to accomplish increased accessibility of workplace retirement savings plans. When would the CalSavers option not fit an employer and should they create their own plan?
- Matching: If the employer would like to offer any type of matching formula, the CalSavers plan would not be a good fit. Matching formulas can be as rich as the employer would like, even setting eligibility timeline for participants to receive said match. One of the many examples that can be used is, (i.e. a 1 year of service to receive 25% up to 3%. SHRM has outlined numerous benefits from creating a match and some workers will even take less pay for a higher 401(k) match.
- Anti-Auto enroll: There are many industries where the administration for employers to adhere to the auto-enroll feature would be burdensome. Creating your own retirement plan would allow the employer to make the plan optional and enrollment optional.
- Highly compensated employees: All employees are capped at an annual $6,000 contribution limit into the plan. This amount may not be enough savings for highly compensated employees to achieve retirement readiness. In a traditional 401(k) plan, employees can defer up to $19,000 plus a $6,000 catch up annually (if age 50 or older).
- Employee Retention: If the employer is in a competitive environment for attracting and retaining employees, a retirement plan can be the missing piece. Employees can defer higher dollar amounts through a traditional 401(k) plan. In addition, employees can have greater access to funds, via loans and hardship withdrawals.
Where to go from here?
Before June 30th of 2020, employers with over 100 employees need to decide to either register for CalSavers or create their own workplace retirement plan. For some employers, the choice is easy and for others, the choice is murky. Although CalSavers will address numerous areas of need within the retirement plan space, there are still gaps. All in all, Burnham Gibson Wealth Advisors can assist in further walking through these and other factors to make this decision. We are proud that California is tackling the lack of retirement savings for its workforce, but CalSavers is not a good fit for everyone.