Even before the financial challenges so many people have faced due to the ongoing COVID-19 pandemic, an estimated one in five Americans had no retirement savings.[i] When employers offer retirement plans, their employees are more likely to save.[ii] Unfortunately, many small businesses still do not sponsor retirement plans for their workers. California’s CalSavers Retirement Savings Program (CalSavers), introduced in 2019, is designed to help as many as 7.5 million Californians access a workplace retirement program, providing a portable option that employees can keep and continue investing in, even if they change employers.[iii]
Who is Covered by CalSavers?
Any California employer with five or more employees must either join CalSavers or offer a private retirement plan for workers. Businesses without separate retirement plans must register with CalSavers by specified deadlines, based on the number of employees. Companies with more than 100 employees were required to register by September 30, 2020. Those with 51-100 employees have until June 30, 2021, while businesses with 5-50 workers must enroll no later than June 30, 2022.[iv] However, businesses do not need to wait until the deadline to enroll. After enrolling in the program, employers must notify CalSavers of new employees within 30 days of hire. CalSavers then sends the worker plan information, and the employee has 30 days to opt out of the plan. An employee who does not opt out is automatically included.
How Does CalSavers Work?
Full-time, part-time, and seasonal employees of companies enrolled in CalSavers can automatically contribute to a Roth IRA through payroll deduction, with a default contribution rate set at 5% of the employee’s gross pay. This contribution rate is adjustable by each employee, who can even choose to opt in and participate, subsequently opt out, and later opt back into the program. Until an employee’s account savings exceeds $1,000, the balance is invested in a CalSavers money market fund. Once the $1,000 threshold is crossed, assets are invested in a target date fund that correlates with the worker’s age. Alternatively, employees can select their own investments.[v]
What are the Costs for CalSavers Accounts, and Who Bears those Costs?
While enrollment in CalSavers is mandatory for covered employers who do not offer separate retirement plans for workers, enrolled businesses do not pay fees and there is no option for employers to make matching contributions to employees’ accounts. Employees who do not opt out of participation pay certain administration expenses, depending on their selected investments. Employers enrolled in CalSavers do not assume any fiduciary liability for the plan. Instead, CalSavers’ governing board is responsible.[vi]
Should Employers Participate in CalSavers?
Enrolling in CalSavers is mandatory if your company has five or more employees and if it does not offer a separate retirement plan for workers. CalSavers can be a convenient way to give your employees access to a retirement savings vehicle. However, there are also potential benefits to establishing an employer-sponsored plan like a 401(k), which could give your workers higher contribution limits and allow you to match employee contributions.[vii] Your financial professional can help you explore and evaluate various options, so you can make an informed decision about how to proceed.
The opinions voiced in this material are for general information only and are not intended to provide
specific advice or recommendations for any individual. To determine which investment(s) may be
appropriate for you, consult your financial professional prior to investing. All performance referenced
is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
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