CalSavers Retirement Savings Program [UPDATED: 2020]

Hi everyone, my name is Tan, and I’m an independent certified financial planner practitioner at TAN Wealth Management. Clients come to us when they need financial advice, such as making their investments more tax-efficient and buying an insurance product, like life insurance, disability insurance, long-term care insurance, and annuity. 

Today’s educational video is on CalSavers, a California retirement savings program.
- We are going to start with what employers need to know about CalSavers.
- What employees need to know about CalSavers.
- And, a real-life example — if my mom is eligible for CalSavers, what would I advise her to do?

What employers need to know about CalSavers:
What is CalSavers?
- CalSavers is a California retirement savings program. If you have 5 or more employees, you need to offer a workplace retirement plan or provide access to CalSavers.
- This is directly from the CalSavers website. “State law requires that California employers, who don’t already offer an employer-sponsored retirement plan and who have five or more employees, either sponsor a retirement plan or participate in CalSavers.” (CalSavers)
- Employers with at least five employees who don’t already offer a workplace retirement plan can register for CalSavers today and must be registered by their required deadline. 

Registration deadline 
June 30, 2020 - More than 100 employees
June 30, 2021 - More than 50 employees
June 30, 2022 - 5 or more employees

“COVID-19 Message: We are here for you. The registration deadline for employers with more than 100 employees has been moved to September 30, 2020.*” (CalSavers)

Below is a flowchart to determine if you need to register for CalSavers or provide a workplace retirement plan. Please confirm your unique situation with CalSavers.

Does the owner have more than 4 employees, and the owner is on the payroll?
No = You do not need to register for CalSavers.
Yes = Do you already offer a workplace retirement plan?

Yes  = You do not need to register for CalSavers.
No = You need to provide a workplace retirement plan or register for CalSavers.

CalSavers Frequently Asked Questions:

I am the owner, and I have 4 employees, do I need to register for CalSavers? 
- I called CalSavers at (855) 650 - 6916, and the representative says that if the owner is on the payroll, the owner is counted as an employee. Therefore, the employer must register by September 30, 2020.

How can employers register for CalSavers?
- ”There are two ways into the Program: either through an employer or by opting-in as an individual (including self-employed and “gig” workers).” (CalSavers)
- You can register online at calsavers.com

What do employers need to do?
1. If the employer is subjected to the law, the employer needs to register for CalSavers before the deadline if they don’t have a workplace retirement plan.
2. Within 30 days, the employer must upload a list of eligible employees. The employer can delegate the task to their staff or external provider. 
3. Once the account is set up, the employer has to submit the contributions. The employer also has to continuously add employees when they are eligible and remove employees when they are not eligible.  

What are the benefits to the employers?
- Provide a workplace retirement plan to employees. This helps the employer attract and retain employees to the business.
- According to CalSavers, “there are no employer fees and no fiduciary responsibility.”
- ”Employers serve a limited role: facilitate the program and submit participating employees' contributions via simple payroll deduction.” (CalSavers)

Employers’ roles
- “Ongoing administrative requirements:
- Maintain their employee census
- Calculate and deduct employee contributions as part of your existing process
- Remit contributions in one transfer per pay period.” (California State Treasurer)

What employers cannot do
- “Make an employer contribution
- Answer questions about program/participation – refer to program
- Make changes to employee accounts/settings – refer to program
- Provide investment advice
- Encourage or discourage participation”
- ”Employers cannot make contributions to employee accounts”
- “Employers are not permitted to endorse the Program or encourage or advise employees on whether to participate, how much (if any) to contribute or provide investment help.” (CalSavers)

What is the cost to the employers
- No cost to the employer except for their time for ongoing administrative requirements because employees pay for the costs. The costs are automatically taken out of the employees’ account balance. Of course, if the employer pays someone to do the administrative work, there will be a cost to the employer. There is no participation cost to the employer from CalSavers.

What are the employers’ liability
- When you look at the fine print on the bottom of the page on the CalSavers website. It says:
- “Saving through an IRA may not be appropriate for all individuals.”
- “Employers do not provide financial advice and employees should not contact an employer for financial advice.”
- “Employers should refer all questions about the Program to CalSavers.”
- “Employers are not liable for decisions employees make pursuant to Section 100034 of the California Government Code.”
- “Employers shall not be a fiduciary, or considered to be a fiduciary, over the California Secure Choice Retirement Savings Trust or the program.”
- “An employer shall not bear responsibility for the administration, investment, or investment performance of the program. An employer shall not be liable with regard to investment returns, program design, and benefits paid to program participants.” (California Legislative Information)

Can the employers contribute to CalSavers?
- The employers can open an account for themselves with CalSavers and contribute to it if they want to.
- “If you’re self-employed (and) don’t work for a CalSavers employer...you can now contribute directly.” (CalSavers)
- Should you open, a CalSavers Retirement Savings Program is the big question. There are other plans such as SEP IRA, Solo 401(k), SIMPLE IRA, defined benefit plan. You want to talk to a qualified professional before making an informed decision. 

What employees need to know about CalSavers:

What are the options for employees?
- Opt-out of CalSavers.
- Opt into CalSavers, open a Roth IRA, and contribute to the plan.
- Opt into CalSavers, open a Traditional IRA, and contribute to the plan.

- This is directly from the CalSavers website, “IRA Type: Default is Roth IRA (allows for penalty-free & tax-free withdrawals of contributions); Traditional IRA as an elective option.” This means you get a Roth IRA when you sign-up. You can switch to a Traditional IRA by telling CalSavers you want a Traditional IRA instead of a Roth IRA. Roth IRA is funding the account with money you already pay taxes on. Therefore, qualified withdrawals in the future are tax-free. Traditional IRA is funding the account with money you have not paid taxes yet. Therefore, withdrawals in the future will be taxable income to you.

- This is directly from CalSavers, “CalSavers accounts are Roth (post-tax) IRAs, and those with higher incomes may not be eligible to contribute. If you earn more than the Roth IRA income limits set by the federal government, you may need to opt-out of CalSavers. Traditional (pre-tax) IRAs will be available by the end of 2019, allowing for those with higher incomes to participate.” (CalSavers)

Opting in and out of CalSavers
- Participation is voluntary.
- Employees can opt in and opt out of CalSavers at any time by mailing in a form, doing it online, or calling the Client Service Team.
- After 30 days, if the employees do not opt out, they will be automatically enrolled.
- “If you opt out before the end of the 30-day notification period, no payroll deductions will be made on your behalf and your account will not be activated.“ (CalSavers)
- “California law requires that CalSavers conduct an Open Enrollment Period once every two years during which eligible employees that previously opted out of the Program shall be re-invited to participate under automatic enrollment and must opt out again if they still do not wish to participate in the Program.” This means you have to opt-out every two years, or else you are going to be opt-in automatically. (CalSavers)

What are CalSavers contribution limits?
- CalSavers follows IRA’s guidelines. The annual maximum contribution limits are the same as contributing to an IRA, which is $6,000 for 2020 if you are under 50 years old. If you are 50 or older, you can contribute $1,000 more, which is $7,000 in total for 2020.
- If you are contributing $6,000 to CalSavers, you cannot contribute another $6,000 to another IRA because you have reached the annual limit. You can contribute $3,000 to CalSavers and $3,000 to another IRA, but you cannot contribute more than the annual limit. You can contribute more than the annual limit if you want to keep paying the penalty as long as the money is in the account. I won’t recommend it.
- The default saving rate is “5% of your gross pay, which is deducted from your paycheck on an after-tax basis.” Employees have the option to change the savings rate at any time. (CalSavers)
- The savings rate increases by 1% annually until it reaches 8%. Employees can opt-out of that option at any time. 
- Saving is through payroll deductions.

What are CalSavers income limits?
- When investors talk about income limits, they are comparing their modified adjusted gross income (MAGI) with the IRS annual retirement plan contribution limits and phase-out table. Can they contribute directly to a Roth IRA or take a tax deduction on the contribution they made to the Traditional IRA? The simple answer to this question is to compare your modified adjusted gross income (MAGI) with the IRS annual retirement plan contribution limits and phase-out table. The best answer to this question is for investors to talk to a qualified professional because there are techniques the professional can guide the investors to do to accomplish the investors’ objectives. Some techniques are backdoor Roth IRA, direct rollover to an employer plan, and tax bracket management.

What is CalSavers vesting schedule?
There is no vesting schedule because the employees contribute to the account, and the employer cannot contribute to the employees’ accounts. The employees are 100% vested from day one.

What are CalSavers accounts investment options?
- As of June 2020, there are 12 target retirement funds, 1 money market fund, 1 core bond fund, 2 global equity funds, and 1 balanced fund. That is a total of 17 funds.
- The default setting is: the first $1,000 will be invested into the CalSavers Money Market Fund, then anything above $1,000 will be invested in a target retirement fund. You can change the investments if you don’t like the default setting. 
- What is a target retirement fund? A target retirement fund is age-based retirement investments, which means you invest in risky investments when you are young, and the investments get more conservative as you get older.

How much does CalSavers cost?
- The 3 main fees are Program Administrator Fee, which goes to the State of California + Program Administrator Fee, which goes to the person that administers the plan + Investment Fees that goes to the financial institutions that manage the investments = the Total Fees the employees pay.
- The total fees range depending on the investments. Some investments have high fees and some investments have low fees.
- This is directly from CalSavers, the “fee is collected in the form of an annual asset-based fee of 0.825% to 0.95%, depending on your investment choice. This means you will pay between 83 cents and 95 cents per year for every $100 in your account, depending on your investment choice.” (CalSavers)
- Fees are automatically taken out of the account balance.

Can the employer contribute to the employees’ accounts?
- The employer cannot contribute to the employees’ account because if they can, it could make the program subject to the Employee Retirement Income Security Act of 1974 which falls under federal law. 

Can you name beneficiaries on the accounts?
- Once you open your account you can name beneficiaries. The beneficiaries are the people that will take over your account once you pass away.
- If you are married, the money will go to your spouse. If the beneficiary is not your spouse, you need “your spouse’s consent to that designation by signing the form and having a notary witness his or her signature.”
- If you are not married and you don’t name a beneficiary by the time you are deceased, the money will go to your estate. (CalSavers)
- What does that mean? If you don’t name a beneficiary and you pass away, the court gets to decide who owns the account.

Are the accounts portable?
- The account is portable which means you can take it with you when you change jobs.
- You can also leave the money in the account, transfer or roll it over to another IRA, or request a distribution. Keep in mind, there might be taxes and penalties if you do it wrong.

What are CalSavers distribution rules?
- Before you make a withdrawal, talk directly to CalSavers representatives and to a qualified professional. You do not want to pay taxes and penalties on the withdrawal amount because you made a mistake.

What are CalSavers lawsuits?
- There are groups that challenge CalSavers and want to know if CalSavers fall under the Employee Retirement Income Security Act of 1974. California stated that “the program is a state-administered program, not an employer-sponsored program.” (California Legislative Information)

Is CalSavers a scam? 
CalSavers is not a scam. It’s a state-administered retirement savings program. If you are not maxing out your Individual Retirement Account, you should definitely talk to a licensed professional because CalSavers might not be the best option for you. 

Why? It has a lot to do with the fees that are associated with CalSavers and limited investment options. I looked everywhere and I also called CalSavers, there is no place for me to know what the administrative fees are, and they won’t tell me. I have a feeling it’s around 70 cents for every $100. Instead of paying 70 cents in fees, you can use it to invest in the market and have it compound for you. 70 cents is a lot. To put it into perspective, let’s say you have $1,000,000 in your IRA, $1,000,000 X .007 = $7,000 in annual fees. If you have $500,000 in your IRA, $500,000 X .007 = $3,500 in annual fees. Imagine you are paying those fees year after year after year. It can make or break your retirement.

My Mother
- If my mother is eligible for CalSavers, there is no way I will allow her to contribute to CalSavers.
- Why? Fees and investment selections.
- Fees. I have a feeling she is going to pay about 70 cents for every $100 in fees. That is a lot when you have thousands of dollars and compounding annually.
- According to the CalSavers website, “you will pay between $0.83 and $0.95 per year for every $100 in your account.” (CalSavers)
- There is nothing wrong with paying fees, but what are you getting for the fees matters a lot.
- My clients pay me in fees, and in return, I give them comprehensive financial advice. Just like you pay your CPA to do your taxes or your lawyer for legal advice. 
- Instead of paying fees to the State of California and to the administrator, invest that money so you can take care of yourself and your family. 
- Investment selections. As of September 2019, there are less than 20 investment options. I did the analysis of the investments in CalSavers. The investments are good, but it’s not the best. If you open a Roth IRA directly with a financial institution, you can choose from thousands of investments, and you can pick the best of the best.

- California copied the program from Oregon, and the program in Oregon is called OregonSaves. I researched OrganSaves, and the fee is about 1%. “This fee is collected in the form of an annual asset-based fee of approximately 1%. This means you will pay approximately $1 for every $100 in your account.” Wow, that is expensive! (OregonSaves)

- I see what California is trying to do. They did a good job, but it’s not the best for consumers because of the high fees and limited investment selections in the program. What they should have done is to hire professionals to teach live financial education online and have employers and employees sit through a 90-minute workshop annually. There should be replays of the recordings so consumers can watch it anytime they like. 

- Please note that all of my videos, podcasts, and blogs are for educational use only and do not constitute tax, legal, or investment advice. Information may be changed or updated without notice. Consult with a licensed professional regarding your personal circumstances.

- I hope you enjoyed the video. Thank you for watching. This is Tan, your trusted advisor.

Resources:
Phone number for Employer: (855) 650 - 6916
Phone number for Employee: (855) 650 - 6918
Email: clientservices@calsavers.com
Website: www.treasurer.ca.gov/scib
Website: www.calsavers.com

This material is for educational use only and does not constitute tax, legal, or investment advice. Information may be changed or updated without notice. Consult with a licensed professional regarding your personal circumstances.

Please do not excerpt or copy this information without prior consent from TAN Wealth Management.