Here's how California's new retirement plan can help employer comply with 2022 law

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Are you a worker worried you won’t have enough money to retire? Are you an employer who doesn’t offer either a pension or a 401(k) to your workers? If so, CalSavers is aimed at you.

On July 1, California launched an ambitious state-sponsored retirement program for the private sector. All employers with five or more workers will be required to sign on if they don’t offer their employees a way to save and invest for retirement. As many as 300,000 businesses must comply over the next three years.

That will give about 7.5 million workers who have no access to a pension, 401(k), or other qualified retirement plan an easy way to deduct savings from their paychecks. And it will bypass often complex and costly setup procedures as well as the liability that has deterred many businesses from offering investment programs to their employees.

“When it comes to retirement income security, most working Californians are in trouble,” said Nari Rhee, director of the Retirement Security Program at University of California-Berkeley’s Center for Labor Research and Education. CalSavers, she said, can help.

In the Golden State, 61% of private-sector workers have no access to a pension or 401(k), up from 49% two decades ago, as businesses have cut back on benefits, a labor center study found.

Social Security, with a current average benefit of $1,461 a month, won’t meet basic needs for many in a state with skyrocketing housing and medical costs.

“People are worried they will have to work until they die,” said Katie Selenski, CalSavers’ executive director. “If our elderly are living in poverty, it is a moral problem, but also a fiscal problem. If they have to rely on public assistance, it drives up taxpayer costs.”

Pennsylvania legislators are circulating a draft bill for private companies to provide insurance. More than 2.1 million Pennsylvanians work for employers that do not offer retirement plans. Financially unprepared retirees will demand social services costing Pennsylvania an additional $14 billion between the years 2015 and 2030, a state retirement task force projects.

The commonwealth has the fifth-largest population over 65 in the U.S. The number of seniors in Pennsylvania — defined as people aged 65 to 74 — will increase by 270,000 by 2025, for a total of 1.55 million seniors in Pennsylvania.

“The auto IRA is a commonsense solution” to the savings crisis, said Pennsylvania Treasurer Joseph Torsella in March, and “has deep and bipartisan roots. Six other states have it, and 20 states are contemplating this in 2019. Over time, it will be financially self-sustaining. It won’t cost business owners one dime, or expose them to liability.”

New Jersey this year passed “portable” IRAs, or individual retirement accounts.

New Jersey Gov. Phil Murphy signed legislation on March 28 creating the state’s Secure Choice Savings Program to help workers whose employers don’t provide plans to establish retirement savings accounts.

New Jersey employers with more than 25 workers are mandated to enroll workers by March 28, 2021. Managing the fund will be the Secure Choice Savings Board, including the state treasurer, comptroller, and director of Office Management and Budget.

States with an automatic-IRA (auto-IRA) include California, Connecticut, Illinois, Maryland, and Oregon.

Here’s how CalSavers works:

Employers of any size can begin voluntarily signing up on Next year, mandatory compliance kicks in. Employers of fewer than five people are exempt, but all others who have not adopted a private market retirement plan must register and allow CalSavers to enroll their workers.

Employers with more than 100 workers have until June 30, 2020, to comply. Employers with more than 50 employees have until June 30, 2021. Those with five or more employees must enroll by June 30, 2022.

“From beginning to end, this process generally takes about 30 minutes; many employers complete it in 15 minutes or less,” the CalSavers website says.

Then employers must remit employee payroll contributions to CalSavers each pay period.

Unlike private market retirement plans offered by financial institutions, which can have high fees, CalSavers is free for employers.

And because CalSavers is sponsored by the state, not the employer, the employer is not vulnerable to lawsuits related to the program.

Employers don’t have to worry about choosing mutual funds. CalSavers takes responsibility for that.

“We take care of all the interaction with employees about their accounts,” Selenski said. “We’ve made the employer experience as seamless and simple as possible.”

Unlike a private market plan, employers aren’t allowed to match contributions.

Once an employer registers, workers are automatically enrolled in a post-tax Roth individual retirement account unless they opt out. A pretax IRA will be available later this year.

Workers can save up to the federal annual maximum of $6,000 for those under age 50 and $7,000 for those 50 or older — the same as for any IRA.

Five% of a worker’s paycheck is automatically deducted, increasing by 1 percentage point a year to 8 percent. But workers are free at any time to change the amount or opt out altogether.

“We are sensitive to the fact that many people work two or three jobs to put food on the table,” Selenski said. “But even if people contribute as little as 1 percent, that adds up over time with the magic of compound interest.”

Workers can take their IRA with them whenever they change jobs.

In theory, workers can go to a financial institution and open their own IRAs. But few do so. Fees, a required minimum balance, and the complexity of figuring out how to invest the money can make the process daunting.

“Research shows that people are 15 times more likely to save for retirement if they have the tools to do so through their employer,” Selenski said.

Over the last year, a pilot CalSavers program enrolled 50 businesses — from a well-paying architectural firm to lower-paying catering and janitorial companies — and found that only 22.5% of their workers opted out of automatic paycheck deductions.

Under the automatic settings, a worker’s first $1,000 in contributions is placed in a low-risk money market fund with the rest invested in a target-date fund, which holds different mixes of stocks, bonds, and other investment based on the expected retirement date.

A sustainable investment fund, which accounts for environmental, social, and governance factors, is available in addition to a core bond fund and a global equity fund.

At the outset of the program, investment fees will be 0.825% to 0.95% of assets, depending on the investment option, but are expected to shrink as the program grows.

CalSavers is overseen by a nine-member public board chaired by the state treasurer. Retirement provider Ascensus, based in Dresher, Pa., will administer the program. Boston-based State Street Global Advisors is the manager of four funds, and Newton Investment Management, based in London, administers the sustainable investment fund.

Beginning in September, workers who are independent contractors, called 1099 workers after the IRS form they use to pay taxes, may enroll in CalSavers individually.

“They will go to our website, sign up, and link their bank accounts to a CalSavers account,” Selenski said.

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