Too many Californians are saving too little for retirement. Baby boomers, the first generation to expect to retire without a pension, are nearly five times more likely to declare bankruptcy than the prior generation.* This is no surprise, since many never had access to a retirement savings program, such as a 401(k) plan, through their employer. A broken system has been laid bare.
The State of California is trying to help solve this retirement crisis with CalSavers. A new law requires every company with at least 50 employees to offer a retirement plan by June 30. (Companies with five or more employees have until June 30, 2022.) If you already offer a 401(k) or similar qualified plan, you will be exempt. If not, you can start a 401(k) or join CalSavers.
Burden or opportunity?
Most employers feel fortunate to help their employees save for retirement, but it’s understandable that some may be frustrated by this new law — especially with the timing. As someone who built a business from 1 to 50 employees, I know the feeling. Business owners toil to pursue a dream that creates prosperity for themself and their employees. That’s hard enough at the best of times, and the cost of doing business has only gone up with COVID-19.
As a business owner, I usually bristle at additional government regulation. But I have a different view of the CalSavers law, because of the time I met Carlos.
The face of modern retirement
Carlos was in his mid-50s and had been a butcher at the same grocery store for over 20 years. When he was hired, he was “put” into the 401(k). He didn’t think much about it, but he stuck with it because of the company match.
Fast forward 20 years, when my firm was selected to manage the 401(k). I was introduced to Carlos at an onsite seminar. He was shy at first, which was jarring because he was 6’4” with shoulders that spanned the walk-in fridge door. But with a little prodding, he talked about his family. As the oldest of three siblings, he got a job right out of high school to help support the family after his mother passed. Now in his 50s, Carlos wondered if he’d ever be able to retire. He wanted to know how much (or how little) was in his account. With Carlos sitting nervously across the table, I looked up his account.
Carlos had over $125,000. He was quiet for a moment, while the news sunk in. Then he started to tear up — retirement could become a reality. While the owner made this possible by offering the plan, their mutual loyalty over 20 years made it happen. The owner achieved his dream and gave his employees the opportunity to prosper. He created a meaningful legacy that nourished hundreds of families for decades.
A step in the right direction
CalSavers will allow more people like Carlos to save for retirement. However, with the government plan, employees are likely to retire with much less than Carlos, and owners miss out on tax credit savings plus the ability to create lasting prosperity for their most loyal employees.
The new law reveals an opportunity for both you and your employees. There is an alternative to the CalSavers program that complies with the law and provides a valuable benefit for employees, with an automated, cost-efficient option that can lead to better retirement outcomes.
A modern 401(k) plan eliminates the ongoing manual work required by CalSavers, comes with a compliance guarantee, and is customizable.† It can lead to higher savings rates by employees, and business owners can also participate.
First, with CalSavers, employees are automatically enrolled at a savings rate starting at 5%, increasing 1% a year until they reach 8%. Unlike Carlos’ 401(k), CalSavers doesn’t give the option to match loyal employees. Savings are capped at $6,000, whereas 401(k) plans allow up to $19,500 annually. (Participants like Carlos who are in their 50s are eligible for a catch-up contribution of $6,500, or $26,000 total.) Less savings going in means lower income coming out during retirement.
Second, with CalSavers, there are no tax deductions for employees. Because Carlos contributed pre-tax earnings, he saved around $2,000 in taxes each year.
The biggest downfall of the CalSavers program may be for you. The business owner is responsible for much of the plan administration: promptly informing the program of every new hire, keeping track of who opted out, recording those who customized their savings rates, updating payroll with every change, etc. Human error happens, but IRS penalties and fines can be severe. The manual process of CalSavers is outdated for our modern workplace. Adding insult to injury, business owners and senior employees who earn more than $140,000 per year ($208,000 if married) may not contribute. Worse still, CalSavers offers no tax credit to the business owner, compared to those maximum $15,000 tax credit employers who offer unlike a 401(k) plan.‡
An alternative to CalSavers: The ForUsAll modern 401(k)
A modern 401(k) eliminates the manual work required by CalSavers, provides more savings opportunities for everyone, and is customizable.
- Easier to administer: A modern 401(k) is integrated with your payroll, automates plan administration, and comes with a compliance guarantee. There is no need to worry about the manual payroll and administrative work required for CalSavers.Customizable: Unlike CalSavers, 401(k)s are customizable. You decide who is eligible, whether to match and how much, and how long employees must stay to keep the match.
- Everyone wins: Unlike CalSavers, business owners and highly compensated employees can participate and business owners have the option to reward their most loyal employees with a company match.
The choice is yours
You can meet state obligations with the basic CalSavers plan or with a modern 401(k) plan that could change your employees’ lives, gives you an extra tax credit, and allows you to build extra retirement savings. As the business owner, you define loyalty for your business and how you want to reward it.
This is an opportunity to rethink your legacy and help loyal employees prosper, for decades to come.
Helping Carlos and thousands of other employees achieve retirement goals is why we started ForUsAll — to offer a turnkey solution that’s cost-effective, streamlined, and compliant with the CalSavers law. Today, we manage more than $1.5 billion of retirement savings for over 70,000 employees at more than 400 companies nationwide. Learn more about how ForUsAll can help you comply with the CalSavers law and help your employees achieve the retirement they deserve.
*Thorne, Deborah and Foohey, Pamela and Lawless, Robert M. and Porter, Katherine M. “Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society,” (August 5, 2018). Indiana Legal Studies Research Paper No. 406. Available at Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society by Deborah Thorne, Pamela Foohey, Robert M. Lawless, Katherine M. Porter :: SSRN
†ForUsAll carries $5 million in professional liability insurance coverage that covers our ERISA fiduciary services.
‡Employers offering a 401(k) or similar qualified retirement plan are eligible for up to $5,000 tax credit per year for three years, up to a maximum tax credit of $15,000. See full details here.