This is part 1 of a series of 4 articles about the new CalSavers Retirement Plan. I sincerely hope that you will stick with me throughout the series as each part has a very distinct purpose. Part 1 will discuss and provide information on what the CalSavers program is and what it is designed to do. It will discuss the Plan in the form as it is written today. Parts 2 and 3 will get into some of the potential issues, both positive and negative, that CalSavers will have to address prior to full implementation. Part 4 will provide actionable next steps for you and your business to determine if CalSavers is the best fit for your business, or if there is a different route you can take to accomplish the same goal while adhering to the rules contained in the law.
As a rule, we are all aware of the coming retirement crisis. If you’ve been living as a hermit for the past decade or so, let me explain. Many of us have failed to adequately save for retirement during our working years. We often think that there is plenty of time to “catch up”, only to find that time marches on and that when we are staring retirement in the face, we realize that we’ve saved far too little for our needs.
So, the State of California, in its infinite wisdom, has a solution to save us all from our own inertia. The program is called CalSavers and will be run through the Office of the Treasurer of the State of California. The stated goal of the program is to require employers to either have a retirement plan offered to their employees through their company, or the State of California will require those employers without a retirement plan to use a state run retirement system. Think, “The Affordable Care Act”, but for retirement savings. Here are a few of the top level key takeaways from this law, which was passed in November, 2018.
•All eligible employers with more than 100 employees are required to register with the program by June 30th, 2020.
•All eligible employers with more than 50 employees are required to register with the program by June 30th, 2021.
•All eligible employers with 5 or more employees are required to register with the program by June 30th, 2022.
•All eligible employers in the program are required to provide the State Administrator of the program with current employee information such as name, current mailing address, phone number, social security number, and email address.
Now, this information is relatively benign, but leaves so many follow-up questions. What makes you an eligible employer? What are the requirements for withholding employee contributions? What investment choices do you, and your employees have within the program? What kind of contribution limits are there for participants? Can an employee opt out of the program, and if they fail to do so, what are the default contributions and investments?
There are so many questions, and Moneywise is here to help provide answers. Let’s answer the most pertinent question first. To be an eligible employer you must not have a qualified retirement plan available for your company, and you must have 5 or more employees. In other words, if your company offers a 401k, SIMPLE IRA, SEP IRA, etc., then you are exempt from this law.
If you do not have a retirement plan for your company, and you have 5 or more employees, you are an eligible employer and must register with the State according to the dates stated above. Where this law gets really confusing is the opt out provisions for your employees. Once you, as an employer, register for the program, the State will send your employees a registration packet via mail or email. The employee can either register or opt out of the program within 30 days of getting their packet. However, if the employee fails to take action within 30 days, then the State determines that the employee approves of the program and is thereby automatically enrolled and has 5% of their pay deducted and contributed to the plan. Guess who gets to keep track of those contributions and deductions (and the angry employee missing some of their paycheck)……yep, the company does.
Where does that 5% contribution go? Currently, the law states that the contributions go into a ROTH Individual Retirement Account or ROTH IRA with a maximum contribution amount of $6,000 per year, or $7,000 for people over 50. The first $1,000 in the account is left in a Stable Value cashlike investment, and every dollar above that amount would be placed into a Target Date Fund according to the participant’s age. There are still questions about who, how, where, and what these investment choices are going to look like simply because the plan isn’t fully developed at this time. I would guess that a state that has trouble with their Public Employees Retirement System (CALPERS) is going to do a great job with our private retirement system…snicker.
There are so many additional nuances to this program, which will be discussed in Parts 2 and 3, and if you are a business owner with 5+ employees, it would be in your best interest to understand how this new law will affect your business and be proactive ASAP. If you think that a forced, state run retirement plan is good for your situation, California has a plan for you. If you would like to take control of your own situation and have direct input on how to best serve your company and your employees, Moneywise is a local, independent + fiduciary solution. We are here to partner with you and serve your best interests.
For more information on how we can help you and your business get on an optimal track, please contact us, Moneywise Wealth Management, at 661-847-1000 or email Justin Leland at firstname.lastname@example.org.
*Disclosure* 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 what is appropriate for you, consult a qualified professional.