Here is everything you need to know about CalSavers

With one in five Americans having saved nothing for retirement, it's more important than ever for businesses to help and encourage their employees to save for the future. Retirement plans, such as 401(k)s and IRAs, may offer significant tax advantages for savers. Employees are 15 times more likely to save for retirement when their company offers a retirement plan. Still, many employers don't offer retirement plans — leaving over 7.5 million California workers without access to workplace retirement plans.

That's why the Golden State is taking matters into its own hands. To help encourage more individuals to save for retirement, California introduced a new initiative in 2019 called CalSavers Retirement Savings Program, or CalSavers for short. The program enables eligible employees to automatically contribute a portion of their paycheck to a Roth IRA, helping them save, in 2023, up to $6,500 a year or $7,500 a year if they're 50 and over.¹

With the initial adoption deadlines having passed in 2022, we've outlined what you need to know about the CalSavers program, how it impacts your business, and how you can stay compliant.

Is the retirement mandate mandatory or optional?

All Golden State employers with one or more employees are required to give employees access to CalSavers, unless they offer a company-sponsored retirement plan, like a 401(k) plan.

When will the retirement mandate go into effect?

Any business with one or more employees is required to adopt the new program, but adoption deadlines depend on employee headcount and are as follows:

• Businesses with 100+ employees: September 30, 2020
• Businesses with 50+ employees: June 30, 2021
• Businesses with 5+ employees: June 30, 2022
• Businesses with 1+ employees: December 31, 2025
• Newly-eligible businesses: December 31 of whichever year they become eligible

While companies with one or more employees have more than two years to make the switch, companies with five or more employees are all now subject to the mandate and are encouraged to register and get into compliance as soon as possible. Enforcement efforts are already in effect.

To opt-in to the program, share employee information, and set up payroll deductions, visit the CalSavers website for a step-by-step sign-up guide.

How much will it cost my business?

Your employees will pay administration fees to participate in the program. Depending on which investment options they select, your employees will be required to pay an annual fee ranging from 0.825 to 0.99%.² The fee will be pulled directly from the assets in their Roth IRA. CalSavers is completely free for employers. It neither requires any employer fees nor employer match contributions.

While the state plans to reduce participant fees as participation thresholds are met, the fees are considerably higher than they would be for company-sponsored plans. A modern 401(k) provider like Guideline has an average fund fee for its managed portfolios of 0.07%³ and an account fee starting at 0.08%.⁴ Lower fees mean more money going towards employees' savings.

What are the alternatives to the CalSavers program?

Employers can also choose to offer private retirement plans. A  common alternative is a 401(k) plan. 401(k) plans have higher contribution limits, allow for matching and profit-sharing, and offer both Traditional and Roth options. As a result, 401(k) plans can enable business owners and employees to potentially save more for retirement.

Guideline 401(k) vs. CalSavers at a glance

Guideline 401(k)

• Offers both Traditional and Roth 401(k) contributions
• Auto-enrollment at any rate between 1-10%
• Employees can contribute up to $22,500 (2023)
• Employers can make contributions for total savings up to $66,000 (2023)
• No cost for employees and low cost for employers

CalSavers

• Only Roth IRA
• Auto-enrollment 5% and auto-escalation up to 8%
• Employees can contribute up to $6,500 (2023)
• Employees pay for plan administration
• Employers cannot make contributions

Additionally, businesses starting a 401(k) for the first time may be eligible for new tax credits under the SECURE Act worth up to $16,500 over three years.⁵

Is auto-enrollment available?

Yes, auto-enrollment is offered under the state-sponsored plan. Once your company opts into the program, your employees will receive an email containing plan details and default elections. Thirty days later, the deductions will be automatically withdrawn from their next paycheck and deposited in their Roth IRA.

Of course, employees are welcome to opt out of the program at any time, which they can do online or by contacting CalSavers' client services.

What types of retirement plans are available to choose from?

With CalSavers, employees are only eligible to contribute to a Roth IRA. CalSavers does offer a few investment options, so your employees can decide how they invest their money. Employees can choose from target-date funds, a money market fund, a core bond fund, a global equity fund, and an Environmental, Social, and Governance (ESG) fund.

Employees earning more than the Roth IRA income limits can recharacterize to a traditional IRA.

What will happen if I miss the program adoption deadline?

If employers miss adoption deadlines or fail to allow employees to participate in the program, they can face penalties of $250 per employee if they don't comply within 90 days of receiving notice. The penalty then increases to $500 per employee if the employer fails to comply within 180 days of receiving notice.

Whether you choose to offer CalSavers or opt for a company-sponsored 401(k) plan, what's important is that you're giving your employees access to retirement benefits and helping them plan for a better future.

With the retirement mandate, small businesses are required to help their employees save for retirement. If this is your first time offering a retirement plan, CalSavers is a great option to fulfill the retirement mandate. If you're looking for more flexible options that could potentially help you save more, this could be a good time to consider starting a 401(k) instead. Guideline makes it easy and affordable for small businesses to start and administer a 401(k). Schedule a time with our team to learn more.

¹ Subject to IRS cost-of-living adjustments. In 2023, individuals can contribute up to $22,500 between their traditional and Roth accounts. If you’re 50 or older, you can contribute an additional $7,500 ($30,000 in total).

² Fees calculated by CalSavers. The fee presented doesn’t include other fees that an employee may incur, including, but not limited to, underlying fund fees. Fees are subject to change by the state without notice and should be checked prior to making any decision.

³ Guideline’s managed portfolios have blended expense ratios ranging from 0.064% to 0.07% of assets under management. Expense ratios for custom portfolios will vary. These expense ratios are subject to change by and paid to the fund(s). View full fund lineup.

⁴ An annual account fee of 0.08% is applied to assets under management and is deducted on a monthly basis. It’s calculated at 1/12 of the annual stated rate (0.08%) based on the account balance on the last day of each month. Alternative pricing is available for plans with 50 or more eligible employees at the time of signup. Contact Sales at hello@guideline.com to learn more.

⁵ This content is for informational purposes only and is not intended to be taken as tax advice. You should consult a tax professional to determine what types of tax credits or deductions your company is eligible to claim.