How California Employers Can Meaningfully Increase Retirement Savings
Siân Killingsworth / 21 Jun 2022 / 401(k) Resources
A comparison of state-managed IRA plans and a private 401(k) retirement plan.
On July 1, 2019, California’s new CalSavers 401(k) program began to fulfill its mission of offering workers in the state a new way to save for their retirements even if their employers do not offer a retirement plan.
CalSavers effectively addresses a crisis that is looming for a large number of employees by making it easier for them to save for their retirements. In many cases, however, a custom 401(k) plan may be a better alternative for small businesses and their employees’ futures. Compare the advantages of CalSavers to a private 401(K) such as those offered by Ubiquity and determine which choice is right for your company’s needs, culture, and bottom line.
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How Will CalSavers Help to Increase Retirement Savings for California Workers?
Studies from similar legislative incentives in other states show that programs like CalSavers will:
- reduce employee costs for participating in retirement plans and
- increase overall participation in those plans by employees of small businesses.
In Oregon, retirement legislation went into effect in 2018. Between its rollout and 2021, total retirement assets held in the state-sponsored program increased from $3.5 million to more than $113 million.
The CalSavers program gives California businesses that have as few as five employees a state-sponsored option for a payroll deduction retirement plan. Employees that participate in the California plan can contribute up to $6,000 per year into a state managed Roth IRA.
Contributions can be directed into a variety of vehicles, all of which are selected by CalSavers administrators:
- targeted date funds
- money market certificates
- bond index funds
- equity funds
- balanced funds
This plan is essentially a bare-bones option for employees who want to save for their retirement but whose employers do not offer a separate payroll savings plan for that purpose.
What Are the Alternatives to the State Retirement Program?
As opposed to a state-run IRA, a private 401(k) plan allows for much higher contribution amounts. This means participants can save more each year and increase compound interest as they approach retirement age.
With the state plan, employees are typically maxed out at contributing $6,000/year, while they can save up to $20,500/year with a 401(k). The total potential savings are even greater for employers, who can save up to $61,000 a year with a 401(k). They achieve this by contributing a maximum of $20,500 as an employee and an additional $40,500 as employer. Furthermore, offering a benefits package that includes a 401(k) with a high contribution limit gives companies a way to stay competitive in the hiring market.
Companies that choose the state plan may also be missing out on significant tax benefits from the government. Because of the SECURE Act, small businesses can earn $16,500 in tax credits ($5,500/year for the first three years) by sponsoring a 401(k) for their employees that includes auto-enrollment. These tax credits – which can be used to cover most of the cost of starting your own retirement savings plan – are NOT available to companies that opt-in to CalSavers.
Additionally, the state plan charges asset-based fees, which means that your employees are penalized for saving more – i.e., the more assets they save, the more fees they are charged. By contrast, flat-fee 401(k)s are more transparent and charge the same fee no matter how much your employees’ assets accumulate. This can add up to a big savings in the long run.
For employers and employees who prefer to have some degree of control over how their savings are invested, small business 401(k)s offer customizable investment lineups. No such option is available with the state plan, where the state mandates how savings are invested.