CalSavers and the California Retirement Plan Mandate

What is the new California retirement savings mandate?

The law requires employers to either offer their own qualifying retirement plan or register to facilitate CalSavers, the plan designed and managed by the state of California.

The goal of the law is to help ensure that all workers have access to a financially secure future through tax-advantaged retirement savings. Complying with the mandate isn’t difficult, there are a lot of good options.

How to comply with the state retirement plan mandate.

If your business currently offers a qualifying plan, all that’s required is that you register with the state of California to show you’re in compliance.

If your business does not offer a plan you have two choices:

1. Start a qualifying plan
2. Register to use the CalSavers plan

The following plans qualify for the state mandate.

403(a), 403b

401(k) plan

408(k) SEP

408(p) SIMPLE

Payroll deduction IRA with automatic enrollment

The penalty for not complying with the mandate.

California will serve failure-to-comply notices to any eligible employer who doesn’t comply with the law. If a business fails to comply within 90 days of receiving the notification, the state will fine $250 per employee. After 180 days the penalty increases to $500.

How most employers comply with the mandate.

The vast majority of businesses in California comply with the retirement mandate by starting a retirement plan through a private company.

Finding the right retirement plan for your company.

The most common plans are 401k’s and IRA’s.

401k plans

These plans were created fifty years ago as a supplement to a pension. Today they’re getting mixed reviews from both employers and employees due to the legal risks, costs and administrative complexities.

Employers offering a 401k plan are a fiduciary to their employees and can be sued for fiduciary mismanagement.

Here are four basic actions necessary to create a 401(k) plan:

– Adopt a written plan.
– Arrange a trust fund for the plan’s assets.
– Develop a record keeping system.
– Provide plan information to participants.

IRA, through payroll

Offering an IRA through payroll removes the cost, complexity and fiduciary risks from the employer and delivers an easy to use, flexible plan to employees.

The Payroll Deduction IRA is probably the simplest retirement arrangement that a business can have. No plan document needs to be adopted under this arrangement.

– Only employees make the contributions.
– Any size business can provide the plan.
– There is no testing or filing requirements.
– All workers qualify.
– No fiduciary responsibility for the employer.

CalSavers

CalSavers the retirement plan managed by the state of California

CalSavers is a retirement savings program sponsored by the State of California. The plan is managed with oversight from a public board chaired by the State Treasurer. The investment options are selected by the Board.

How it works

Employers that do not offer a qualifying retirement plan, must enroll in CalSavers. This plan requires all employees to be automatically enrolled into the CalSavers plan, a Roth IRA. The automatic contribution rate is 5% of salary, amount increases up to 8% where it maxes out. Employees can change their contributions and opt-out of the plan at any time. The plan type is a Roth IRA and employees’ contributions are post-tax. Contributions are made through payroll deductions.

Employer responsibilities using CalSavers

Contributions must be submitted to the program for each paycheck and remitted within seven days of taking the deduction out of the participating employee’s paycheck.

The plan requires the following administrative tasks:

1. Register all employees
2. Update employee participation data
3. Add new employees
4. Manually enroll employees and make annual increases to their contribution amounts
5. Track and honor employees opt-out requests
6. Update payroll system with correct data

CalSavers fees

Employers don’t pay any fees to the state for using the state-run plan.

Employees are charged about 0.95% in investment fees and state plan administrative fees.

CalSavers investments

The first $1,000 in contributions for each participant will be invested in a money market fund for capital preservation.  After that most participants are defaulted into a target date fund.