Did you know that California has a state-mandated retirement plan? That means it is now a requirement for employers (with five or more employees) in the state to provide a group retirement plan for their employees.
While many large employers commonly have employee benefits, such as a retirement plan (i.e. 401K), that’s not the case with smaller employers. In fact, according to an AARP study (https://www.aarp.org/content/
Common reasons most smaller employers do not have a 401K:
- the desire to keep things simple (I own a XYZ firm, what do I know about setting up a 401K plan?)
- administrative fees (I’m a small business, so unless the expense is a necessity, it’s too much for me.)
- complexity (I don’t have time to learn something new that’s not pertinent to my line of work.)
- increased liability (What if something goes wrong?)
Good news! CalSavers was designed to minimize administrative complexity, fees (it’s completely free to the employer), and fiduciary liability for employers. It allows employees to contribute directly from their paycheck into a Roth IRA type plan. Investments are also simplified. The first $1,000 will be in a money market, the rest will be in a target date fund.
Target date funds are invested based on risk tolerance, which is determined by the length of time before the “target date”, in this case retirement age. The longer the time, the more aggressive the investment. The shorter the time, the more conservative and less volatile the investment.
Below is a chart comparing CalSavers to a Roth IRA and a 401K plan:
Furthermore, the amount contributed into CalSavers will be offset by an individual’s own IRA or Roth IRA contributions for that year. However, CalSavers contributions are independent of any employer-sponsored retirement contributions.
If an employer chooses to sign up for CalSavers, the employer will deduct 5% of gross pay from each employee (over the age of 18), automatically increase it each year until it reaches 8%, and contribute it into the employee’s CalSavers account. The contribution will not be tax-deductible for either the employer or the employee. The employee can always change the contribution amount, opt out of auto-increase or completely opt out of the program. If an employee expects to have an adjusted gross income that is over the phase-out, he or she will need to opt out of CalSavers. Unlike a 401K, a CalSavers account is established and maintained by the CalSavers Retirement Savings Investment Board, governed by the State of California, and not by the employer. Therefore, the employer avoids many of the logistical issues, fees, and liability that arise from setting up a plan.
Since CalSavers merely started a few weeks ago, some businesses are wary of dealing with a newly established government run program. If that is the case, the only other alternative is to set up a qualified retirement plan. This includes 401K, Profit Sharing, Defined Benefit/Cash Balance, 403b, SEP and SIMPLE IRA plans. While there is a learning curve associated to implementing a group retirement plan, the employer has a lot more control and flexibility over its own plan. More information regarding CalSavers can be found here: https://saver.calsavers.com/
One of the biggest benefits of setting up a group plan is the tax benefit for employees and employers. Employees are able to contribute on a pre-tax basis if they prefer. That, with the increased contribution limit for a 401K plan, could yield significant tax savings for the employee. Plans can be designed so employers are able to maximize the owner’s retirement account, while decreasing the company tax liability.
Unfortunately, ignorance is not bliss. Failure to comply gets pretty expensive, pretty quickly. Penalties start at $250 per employee if not in compliance within 90 days and increases to $500 per employee if still not in compliance by 180 days.
Clearly, there are pros and cons to either option. Please talk to your financial advisor to review the choices you have before the deadline.
Donna Lea is the President of Financially Yours Advisory Services, a full- service financial planning firm that specializes in working with young families, retirees, and small businesses. She has her Certified Financial Planner ™ designation and serves her clients with a pro-active approach while providing personalized service. Being an independent financial advisor allows her to use a wide range of products without regard to corporate restraints. She takes a holistic approach to her clients’ needs, commonly coordinating with their other professionals. Each professional has an area of expertise, but it requires a coordination of efforts to bring a solution to fruition. For more information about her practice, please visit www.financially- yours.com, or email her at donna@financially-yours.com. Her address is located at 1420 East Chapman Ave. Orange, CA 92866 and you can reach her at (714) 704-9085.
Securities, Insurance, and Advisory services offered through Royal Alliance Associates, Inc.(RAA), member FINRA/SIPC. Additional advisory services offered through NWF Advisory Services, Inc., a registered investment advisor not affiliated with RAA. Financially Yours Advisory Services and RAA are separate and unrelated companies.