CalSavers is a state run auto-enroll ROTH I.R.A., launched in 2019 as a response to California legislation for all types of employers to offer some type of retirement plan for their workers to save in attempt to help today’s workforce adequately prepare for a financially secure future.
As a small business owner, you may ask is this mandate really necessary. Why is the government stepping in now and imposing more requirements on my business?
It starts with the fact that people have the potential to live longer today than in any other time in history, and as such, workers need to financially prepare themselves for a longer lifespan. And by extension, a longer retirement. In today’s economy, the burden of obtaining a financially secure retirement is falling on employees—rather than the employer. Insufficient savings, coupled with subpar or unequal economic growth, rising household debt, and low investment interest rates, are preventing today’s workers from achieving the retirement reality they always envisioned.
The necessity is the current retirement landscape is unsustainable; too few people are adequately preparing for the golden years of their lives, too many people are relying on Social Security to fund their retirement, and too frequently, employers aren’t doing anything to help. If we continue down this path, the future (not to mention the economy) may look drastically different than what we envision when thinking about retirement and the future in general.
Consider, when a mass of people hit retirement and they don’t have adequate savings to cover things like healthcare, housing costs, and other every day essentials, it’s the states that end up paying more money—both earlier and longer—than the federal government. CalSavers is stepping in because with 10,000 Baby Boomers reaching Full Retirement Age every single day, California is starting to feel the pain.
Workers clearly need a little bit of help from their employers to reach maximum retirement readiness.
The fact of the matter is this: workers are more likely to take control of their retirement outcomes and proactively save for the future when they have access to an employer-sponsored plan. According to Employee Benefit Research Institute, 77% of Americans across the nation with median income between $30,000 to $50,000 are saving if they have an employer plan, and a disturbing 3.6% if no employer plan is offered.
There are large discrepancies in regard to employees even having access to a retirement savings plan based on company size, industry, employee education level, and the like. California now mandates all employers offer some type of savings plan to employees, allowing workers who would otherwise not have access to a plan to begin putting away money for their future.
How will business owners, now being mandated to offer either CalSavers or another type of retirement plan, be affected?
Wage cost may be an initial concern for some—but in reality, CalSavers doesn’t take funds out of small business owners’ pockets since the plan will be state-funded and state-run. However, the employer can expect a time expense in learning administration and answering employee questions, necessary to implement the program. Currently, if employees do not ‘opt out’, employers will send payroll contributions to a CalSavers account. This is like payroll taxes, Social Security, and Medicare.
The employer is responsible for providing employee information, setting up payroll deductions, and keeping a record of employee contributions. One problem is, many small employers are not prepared with the knowledge or time to respond to this upcoming requirement.
Private retirement plans such as a 401(k) can offer more benefits for the employer, the employees, and satisfy the legislative mandate. Benefits include:
- Employer fees can be tax deductible
- Participants can save more than any other retirement savings vehicle
- Owner-only Solo401(k) options are available
- Matching contributions are allowed to attract the best employees
- The 401(k) comes with plenty of help in the process
- If the employer chooses to use a private retirement plan provider, the cost of sponsoring a retirement plan tends to be lower than that of other benefits that are usually offered to employees, like health insurance and paid leave
Should I offer my employees a state IRA or a 401(k)?
A recent survey reported that nearly three in four employers believe most of their employees could continue working until age 65 and still not have enough saved to meet their retirement needs.
Kudos to the state governments for stepping in to provide some type of solution to this problem—but a state-run plan may not be the best option to help workers truly own their retirement readiness and reach financial independence. Taking a cue from this statistic, doesn’t it make more sense to offer a retirement plan that employees can save more than $6,000 per year in? Why not offer a retirement plan such as a 401(k), where employees can save up to $19,000 per year? Wouldn’t that get employees much closer to reaching the retirement of their dreams? And not just them—but the business owner, as well?
The deadlines for CalSavers enrollment or establishing another plan like a 401k (k) vary depending on the size of your business. Size is determined based on the average number of employees you report to the Employment Development Department quarterly. For eligible employers with more than 100 employees June 30, 2020 is your deadline. For employers with more than 50 employees, June 2021 is your deadline. For employers with 5 or more employees June 30, 2022 is your deadline. Penalties are stiff starting at $250 per employee if noncompliance extends past 90 days.
We know that the new retirement state mandates are creating uncertainty and murkiness around employers’ specific requirements, but we want to remind you that you’re not in this alone There’s a certain factor of convenience with choosing the state plan—we get it. But when it comes to taking care of your and your employees’ futures don’t wait. You can receive more assistance with a higher degree of added value and customization for you and your employees with a 401(k).
This piece was contributed by Shannon “Shãn” Sutherland, AIF®, AAMS®, ADPA Wealth Advisor. Sutherland is an advisor in our Business Program, and has set up 401(k) retirement trusts for companies with 100+ employees and, more frequently, individual 401(k)s for S-Corps. Being responsible for the money of others, she obtained the Accredited Investment Fiduciary® (AIF®) designation, which increased her knowledge of fiduciary considerations when reviewing retirement plans. The AIF® process is best applied to overseeing and recommending choices for large-scale 401(k) retirement plan asset and charitable trusts. She also advises other fiduciaries (such as board members) on investment policies, asset allocation, and regulatory updates.
Sutherland owns Simple Impact LLC Investments. Located at 4500 Park Granada, Suite 202 Calabasas, CA 91302 . Call us today at 424.422.1001. (CA Insurance Lic. #0D28620) is a Registered Representative and an Investment Adviser Representative with/and offers securities and advisory services through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services offered by Simple Impact or CES Insurance Agency.