Introduction to CalSavers – California’s Mandatory Retirement Plan
California has taken legislative action that requires retirement plans to be offered through employers. Business owners need to be aware of the CalSavers program, as well as its recent legal expansion that impacts more employers than ever before.
In this article you’ll be given a full breakdown on what CalSavers is, how it works, how it’s changed, what its advantages and disadvantages are, and what actions you can take to prepare.
Table of Contents
- What Is CalSavers?
- Who Does CalSavers Affect?
- How Does CalSavers Work?
- Are There Alternative Actions I Can Take?
- What Are The Pros And Cons Of CalSavers?
- What’s The Deadline For Joining CalSavers?
- What Happens If An Employer Does Not Follow The Requirement Of The California Mandatory Retirement Program?
What Is CalSavers?
CalSavers is a California state-sponsored retirement savings program. The plan is run through businesses, and is funded by employee contributions.
The legislation behind Calsavers mandates that employers must offer a retirement savings plan to their employees. However, that doesn’t mean they must participate in CalSavers. Employers have the option of offering their own alternative plans
Nevertheless, some sort of qualified retirement plan must be offered to employees. Otherwise, businesses are subject to sizable fines.
Who Does CalSavers Affect?
CalSavers affects employers who don’t have a retirement plan in place for employees. So generally speaking, it’s been small businesses or private-sector employers who have had to take a closer look at the law’s requirements.
However, starting January 1, 2023, CalSavers requirements will begin to affect any California employer with at least one employee other than the business owner themself.
How Does CalSavers Work?
If CalSavers is chosen over an alternative retirement plan, employees will contribute to the state-sponsored plan via payroll deductions. Employees enrolled by their employer may opt out whenever they’d like. And should they change jobs, CalSavers’ portability will allow them to take their savings with them.
Contributor Rules of CalSavers
Only employees can contribute to CalSavers. However, sole proprietors or partners in a partnership of an eligible employer may also be able to contribute. Additional qualification requirements include:
- Being 18 or older
- Having an employee status under Unemployment Insurance Code Section 621
- Receiving a Form W-2, with wages from California and an eligible employer
Individuals can also contribute to CalSavers independent of their employer. However, these additional qualifications will apply:
- Having an income and bank account
- Providing all necessary personal information to administer the plan
- Making a starter contribution for as low as $10
Enrollment Into CalSavers
California makes enrollment in its state-sponsored retirement plan easy. That’s because state law established the plan with automatic enrollment. Therefore, all eligible employees who don’t opt out of California’s retirement plan will be automatically enrolled in an account.
Automatic enrollment happens at a default 5% contribution rate. And this rate will increase by 1% annually until it reaches the 8% maximum. However, contributors can change their contribution level or rate of increase anytime they choose.
Investment Options of CalSavers
Following enrollment, contributions are placed inside the CalSavers Money Market for 30 days. After this, employees have the option to let their money and future investments rollover into a CalSavers Target Retirement Fund. This fund is based on the contributor’s age, and expected retirement date.
But CalSavers contributors have the option of customizing their investments as well. Instead of an automatic transfer into a Calsavers Target Retirement Fund, contributors can choose from one of the following:
- Money Market Fund
- Global Equity Fund
- Core Bond Fund
- Environmental, Social, Governance Fund
Are There Alternative Actions I Can Take?
Absolutely. Participation in CalSavers isn’t mandatory. You just have to offer your employees an alternative, qualifying retirement plan. These plans include:
- 401(a) Qualified Plans (Profit-Sharing or Defined Benefit Plans)
- 401(k) Plans
- 403(a) Qualified Annuity Plans
- 403(b) Tax-Sheltered Annuity Plans
- 408(p) (SIMPLE) IRA Plan
- IRAs with payroll deductions and automatic enrollment
Please Note: Each of these plans has their own pros and cons. But we can help you find the one(s) best suited to you, and your business. If you’re interested to learn more about alternative qualifying retirement plans, contact us.
What Are The Pros And Cons Of CalSavers?
Convenience: With an automatic enrollment, and minimal administrative maintenance, using CalSavers as an effective retirement plan is very simple.
Affordable: CalSavers has no employer fees, and employers don’t contribute to employee accounts. This can make it a more affordable option for business owners.
Help Employees: CalSavers provides a simple way to help your employees prepare for retirement if you do not have a qualified account already in place.
Lower Contribution Limits: Compared to some alternative qualifying retirement plans (ex: 401(k) plans), contributions limits on CalSavers accounts are significantly lower.
Fewer Options: CalSavers offers fewer investment options to participants than other qualified retirement plans.
Fees: Participants in CalSavers are subject to investment, state, and administrative fees. These can total much higher than alternative, qualifying retirement plans.
What’s The Deadline For Joining CalSavers?
Senate Bill 11261 was signed into law on August 29, 2022. This expanded CalSavers mandates to the majority of California employers. So starting on January 1st of 2023, any California business owner with one employee (other than themself) will need to participate or offer a qualifying alternative retirement plan.
These employers have until December 31st, 2025, to register for CalSavers (or offer another qualifying retirement plan).
What Happens If An Employer Does Not Follow The Requirement Of The California Mandatory Retirement Program?
There are penalties for not abiding by California’s retirement legislation. Eligible employers who fail to join CalSavers on time, or offer an alternative qualifying retirement plan, will receive a failure-to-comply notice from the state.
If no action is taken within 90 days of receiving the notice, California will fine the business $250 per employee. After 180 days, this fine increases by $500 to $750 per employee.
How Can We Help You?
Fischer Investment Strategies – Retirement Services is well aware of the impact CalSavers can have on employers and their employees. And we’re here to help you navigate California’s retirement laws in the ways that best serve you.
As a team we’re able to review your retirement plan options, and find the plan that’s best suited to you, and your business needs.
If you’re looking to establish the right retirement plan for your business, reach out to our Westlake office at (805) 418-7686. Or, fill out the contact form, and we’ll reach back out to you.
This commentary reflects the personal opinions, viewpoints and analyses of the Fischer Investment Strategies, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Fischer Investment Strategies, LLC or performance returns of any Fischer Investment Strategies, LLC client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Fischer Investment Strategies, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Ted Fischer is a Fee-Only Certified Financial Planner® & fiduciary, and the founder of Fischer Investment Strategies.
Drawing from more than 25 years of experience in the financial services industry, Ted's expertise includes retirement planning, investment analysis, tax planning, estate planning, and insurance.
Ted has an extensive academic background. He received his Certified Financial Planning (CFP®) designation from UCLA in 2011. He became a Qualified Plan Financial Consultant (QPFC®) and an Accredited Investment Fiduciary (AIF®). Ted has a Bachelor of Science in Marketing, with a minor in Finance, from San Diego State University.