California has recently joined the growing number of states that have mandated certain companies to provide retirement plans for their employees. This is due to statistics showing Californians are not adequately saving for retirement and are at risk of great financial hardship in their later years.
Employers can either use the CalSavers retirement program, a state-managed plan that allows employees to choose between one of five funds to invest in, or choose their own retirement program, preferably with the help of a financial professional.
What kind of companies have to provide retirement vehicles?
Any company that has, on average, 5 or more employees. For those with only 5 employees, the deadline to register for CalSavers was June 30th, 2022. Employers who have not registered or chosen a different retirement plan face a $250 fine for every employee in their company.
What should employers choose?
While CalSavers is easy to set up, it may not be right for those employers who want to recruit and retain prized workers. This mandate will force employers to be more competitive in their benefits packages and we can expect that companies will want to provide better plans than what CalSavers has to offer.
Let’s look at some of the benefits and drawbacks of CalSavers compared to other retirement plans.
CalSavers puts into the Roth.
This is great! Many people are unaware of the benefits of the Roth IRA. Taxes are immediately paid on any money put into the plan but then grow tax-free, reducing hefty and sometimes unexpected tax burdens upon retirement.
The Roth has limited contributions
Unfortunately, since it is a Roth, employees earning over $144,000 annually cannot participate in this plan. Thus, higher-earning employees such as managers and salespeople may not qualify for it. Additionally, employees are able to put in only $6,000 per year due to it functioning like a Roth IRA. Many employees may want to put in a much greater sum to ensure they have a comfortable retirement.
Limited Tax Flexibility
Sometimes it may be better to put into traditional retirement plans as part of a tax optimization strategy. It may make sense to defer paying taxes to stay in a lower tax bracket for the year – a financial advisor can figure out the best contribution ratio to both a traditional and Roth retirement plan. The CalSavers is inflexible in this regard and doesn’t allow for pre-tax contributions.
Employers cannot do an employer match.
One great recruiting tool to land talented prospects and retain them is an employer-matching retirement plan. Such a plan essentially gives employees free money and greatly enhances their retirement fitness. If a company chooses CalSavers, it will lose this recruitment tool.
Severely limited investment options
The CalSavers retirement plan gives workers the choice of only 5 funds to invest in. This is in stark contrast to the thousands of bonds, stocks, ETFs, mutual funds, and annuities financial advisors have access to. These vehicles allow financial advisors to give much more customized retirement plans.
In Conclusion
It’s not to say that the CalSavers retirement program is a bad retirement program. It surely is better than nothing! But it is the bare minimum of a plan, offering little in the way of investment options, contribution flexibility, and tax optimization. It does shine in its ease of use, simple registration, and automatic enrollment and payroll deduction.
With that said, there are better options for employers. We here at Walters Strategic Advisors can offer advice on what plan would be best for you and your employees, whether it be a 401(K), SEP, SIMPLE IRA, or something else. Reach out to us today.
