Is CalSavers Really the Best Retirement Plan Solution?

May 2022
California, the most populous US state, recently initiated a state-sponsored retirement savings program called CalSavers. It’s available to any California worker whose employer does not offer a retirement plan, those who are self-employed, and others who want extra retirement savings. It is completely voluntary; those who opt-in contribute to their own Individual Retirement Account (IRA).

It’s great that California is taking the initiative to offer a retirement savings plan to its citizens who have been typically excluded, especially considering that 64 percent of Americans do not have enough savings to cover their retirement. However, CalSavings may not be the best retirement plan solution.

How CalSavers Works

The State of California now requires employers that don’t participate in an employer-sponsored retirement plan to provide their employees access to CalSavers, an IRA sponsored by the state. The idea is to help ensure more Americans are saving for retirement. Employers do not have to pay for their involvement in CalSavers.
Employers must inform CalSavers within 30 days of hiring each new employee, allowing the program to send the individual information about the plan. CalSavers offers several options for retirement savings:
  1. They choose the percentage of their income they want to contribute and have the option to auto-increase their contributions every year up to eight percent.
  2. If they do nothing, they will automatically be enrolled at contributing five percent of their income. They can opt-out of this at any time.
  3. They can decline participation within 30 days of receiving information from CalSavers.
Those who choose to contribute to their CalSavers IRA will have their contributions deducted from their paychecks automatically. Their first $1,000 in contributions will be invested into a money market account, then the rest will go into a Roth IRA of their choosing.

Why CalSavers May Not Be the Best Solution

California is making a smart decision in addressing the problem that many of its constituents do not have enough retirement savings. Still, as a retirement savings plan, CalSavers remains inadequate in a few ways.

The fees associated with a CalSavers IRA are significant, as the state of California chose a company called Ascensus to manage the plan. Individuals who contribute to a CalSavers IRA will be charged asset-based fees between roughly 0.825 percent and 0.95 percent. These fees are notably higher than other discount brokers, such as Fidelity and Vanguard. The state should have been able to negotiate a much better deal to lower the fees for CalSavers participants.

Second, CalSavers does not offer the option for employers to match contributions voluntarily. This  means workers end up missing out on additional retirement savings funds. If the whole idea is to help more California workers build up an adequate retirement savings fund, employers should at least have the option to match.

Finally, why did California choose its state-sponsored retirement plan to be a Roth IRA instead of a traditional 401K? Traditional 401Ks offer a higher maximum yearly contribution at $20,500 compared to the Roth IRA’s at $6,000. Also, with 401Ks, you are taxed when you take the money out rather than immediately. The reverse is true for Roth IRAs. Most workers who will be using CalSavers are Gen X, Millennials, and Gen Z, whose personal savings rates are low to begin with. Most need the tax deductions now rather than later, making the 401K a much better plan. At least give people the option of choosing between a Roth IRA and a traditional 401K for the CalSavers retirement plan.

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