California has a long track record of setting the legislative pace for other states across the country: Take its CalSavers retirement savings program, piloted in 2018 and one of the first state-sponsored retirement plans for private-sector employees. It’s designed to bridge the retirement plan gap, especially with workers at small businesses.
States like Illinois and Oregon have started similar programs, and several other states are in the process of developing them. But in California, there are alternatives to CalSavers — and there are good reasons to consider them.
CalSavers facilitates access to a retirement savings program for workers whose employers don’t offer one, in addition to self-employed workers and those who want an additional retirement savings vehicle.
Employer participation in CalSavers is mandated if an employer doesn’t sponsor a retirement plan like a 401(k). CalSavers has so far been popular: With registration complete for one of three employer segments, CalSavers estimates an average of 65% of the state’s eligible employees have not opted out.
Organizations with 100 or fewer workers employ 40% of all American workers but are the least likely to have an employer-sponsored retirement plan. That explains the impetus behind government-sponsored programs like CalSavers. Congress recognized the need as well, and the federal 2020 SECURE Act included provisions to make 401(k) plans more feasible for smaller employers.
So now that California employers have two options, do they sign up for CalSavers? Or is a 401(k) better for them and their employees?
Comparing CalSavers and small-business 401(k) plans
For any California-based employer faced with the choice, knowing the differences between a 401(k) plan and CalSavers is essential in helping make an informed decision. Here is a comparison of the two types of plans:
- The 401(k) is available to employees and the employers themselves. A 401(k) plan can have a waiting period and exclude some employees statutorily.
- CalSavers is designed so employees can contribute, but for an employer to take part in the plan through payroll deductions, he or she must also be designated as an employee.
- Employer advantages
- A small business 401(k) has a flexible plan design and vesting schedule for employer contributions. Owners and highly compensated employees have enhanced contribution options, making it a recruiting and retention tool. Payroll integration is another benefit, easing record-keeping and ensuring compliance with the Internal Revenue Service and ERISA.
- CalSavers places little burden on employers: There’s no setup cost, no fiduciary liability and no year-end process.
- Employee advantages
- The 401(k) offers high contribution limits, employer matching and tax savings with pretax paycheck deductions and post-tax Roth plan deductions are bonuses with the 401(k). Plan members have access to their money via loans, and their accounts are protected under ERISA rules from creditors.
- There is no vesting schedule with a CalSavers account.
- Elements of the 401(k) add to the complexity and costs of managing the plan. These include annual notices and plan testing for regulatory compliance. Plan maintenance can be another concern.
- Employers who are not contributing as employees must pay in from their bank accounts, not payroll deductions. Employees don’t benefit from ERISA protection from creditors and lose out on employer-matching contributions, if offered.
- Contribution limits
- For the 401(k), the maximum contribution is $19,500 for 2021. Those aged 50 and over have an additional catch-up limit of $6,500.
- The annual contribution limit for CalSavers is $6,000; the catch-up limit is $1,000.
Ultimately, employers must weigh the advantages and disadvantages of 401(k)s and state-run and mandated programs like CalSavers against the long-term needs of the business and its workers.
Our small business retirement plan offering, HUB Retirement Select, is specifically designed for small to mid-sized organizations who want an easy to administer 401(k) plan that addresses fiduciary risk and helps employees save for retirement. Contact HUB to speak to a retirement specialist and learn more about HUB Retirement Services.
HUB Retirement and Private Wealth employees are Registered Representatives of and offer Securities and Advisory services through various Broker Dealers and Registered Investment Advisers, which may or may not be affiliated with HUB International. Insurance services are offered through HUB International, an affiliate. Consult your financial professional for additional information about the provision of specific securities, investment advisory and insurance services by each broker‐dealer and investment adviser.
Investment News, “CalSavers registers thousands of businesses, will see bump,” October 1, 2020.
U.S. Small Business Administration, Small Business Retirement Plan Availability and Worker Participation, March 2010.