Designed to help workers build financial security, California’s CalSavers program is a well-intentioned initiative. But like any program, CalSavers comes with both advantages and drawbacks for employers and employees alike.
Whether you are an employer trying to understand how CalSavers affects your business or an employee weighing whether to stay enrolled, this article outlines the benefits and challenges on both sides.
What is CalSavers?
CalSavers automatically enrolls eligible employees into a Roth IRA with contributions made through payroll deductions. The default contribution is 5 percent of gross pay, but employees can choose to adjust the amount or opt out completely.
California employers with five or more employees who do not offer a retirement plan must register for CalSavers or offer their own qualifying retirement plan.
Benefits for Employers
1. Easy to Administer
CalSavers does not require employers to manage investment plans or make contributions. Once enrolled, employers only need to facilitate payroll deductions and keep employee records up to date.
2. No Employer Fees or Fiduciary Risk
There is no cost to the employer to participate in CalSavers. Additionally, employers are not responsible for investment decisions or account performance, which limits legal exposure.
3. Helps Attract Talent
Offering access to a retirement savings option can make small businesses more attractive to job seekers, especially in competitive hiring environments.
Cons for Employers
1. Administrative Responsibility
Even though CalSavers is relatively simple, employers are still required to handle registration, employee communication, and payroll integration. This can add to the workload, especially for small businesses with limited HR resources.
2. Penalties for Noncompliance
Businesses that do not register or certify an exemption can face penalties. Fines start at $250 per eligible employee and increase if the business continues to ignore compliance notices.
3. Limited Control Over Retirement Offerings
Employers who want to provide a more robust or customized retirement plan may find CalSavers too restrictive. It offers limited investment options and does not allow employer contributions.
4. Limited or Zero Benefits for Business Owners
Most business owners reap little to no benefit from the Calsavers plan due to Roth IRA income limits and the plan’s low contribution limit.
Benefits for Employees
1. Automatic Enrollment Encourages Saving
Employees are automatically enrolled, which removes common barriers to starting retirement savings. This helps create positive financial habits without requiring complex decision-making.
2. Flexible Contribution Options
Participants can change their contribution rate or opt out entirely. This gives them control over how much they save based on personal financial circumstances.
3. Portability
The Roth IRA belongs to the employee, not the employer. This means workers can take their savings with them if they change jobs or move out of state.
Cons for Employees
1. Income Limits for Roth IRAs
High earners may be ineligible to contribute to a Roth IRA due to federal income restrictions. This could limit the program’s usefulness for some employees.
2. Limited Investment Options
While the program offers simplicity, it may not provide the same variety of investment choices or potential growth as a traditional employer-sponsored retirement plan like a 401(k).
3. Lower Contribution Limits
Roth IRAs have lower annual contribution limits compared to 401(k) plans. This could slow long-term savings for employees trying to build a significant nest egg.
Weigh Your Options Carefully
CalSavers is a practical tool for expanding access to retirement savings, especially for workers in small businesses. Employers benefit from a low-cost way to support their employees’ financial futures, and employees gain a simple, automatic path to saving.
However, both parties should weigh the tradeoffs. Employers may prefer offering their own retirement plan to gain flexibility and provide higher value to their team. Employees should evaluate whether the Roth IRA meets their long-term financial goals.
If you are a business owner or employee with questions about CalSavers or private retirement plan options, contact our office to schedule an appointment. We will work together to make informed decisions that align with your financial goals.