Here’s A New Retirement Decision

If you operate a business in California, you may occasionally look to the sky in frustration and shout something like: “Why can’t this state pass something that is not costly and burdensome for me and actually does some good?” Well, maybe – just maybe – the state has done that. California over the next few years will require all businesses and nonprofits with five or more employees to offer a retirement plan to its workers. But it’s doing so in such a way that it shouldn’t impose much of a burden on businesses. And it should do a lot of good for us all. Under the new requirement, businesses with 100 or more employees must have a retirement plan deployed by June 30 of next year. Which means those companies that don’t now offer a retirement plan need to get busy soon. Those with 50 or more employees have another year, and those with 5 or more have an additional year – or until June 30, 2022. If you don’t act, you’re looking at fines that escalate with time. If you already offer a retirement plan, you’re set. However, you may have to go through the hoops of proving to the state that you have a qualified plan; it’s unclear that the state has any way of knowing that your plan exists. If you don’t have a retirement plan, the state has come up with a kind of default plan called CalSavers. It appears to be easy and low cost. Employers may like that CalSavers has no fees for the employer to pay, no annual reporting tasks and imposes no fiduciary responsibilities on the employer. That last point is important because it means employers would not be exposed in court if something goes wrong, say, with the investment decisions. That’ll be the state’s problem. However, CalSavers does have limitations. Your employees may grumble that the investment options are paltry and that the fees they have to pay are relatively high. (According to CalSavers’ literature, it charges participants 83-95 cents a year for each $100 in the account. Vanguard, well-known for its low-cost IRAs, reportedly has an average fee of 18 cents.) And employers still have work to do if they sign up with CalSavers. They must enroll employees, keep track of each employee’s contribution rate and submit that contribution, add and subtract employees when necessary, etc. But the immediate task is deciding what to do. If you’re a business operator, at some point soon you must stop whatever you’re doing so you can research whether CalSavers is better than a private-sector retirement plan. And yeah, it can get involved. For example, some private-sector plans have a tax benefit for the employer that CalSavers does not. On the other hand, CalSavers would not necessitate an annual audit – required by federal law for plans with 100 or more eligible participants – which can cost in the range of $5,000 to $10,000 each year. In short, you’ve got to climb the decision tree to get to the limb that’s best for you. Did I mention that there should be some good to come from all this? As you may know, various sources have long lamented that a surprising number of working Americans are staring at retirement poverty. A shocking survey from the National Institute on Retirement Security a few years ago claimed the median retirement-account balance for near-retirement households was $14,500. Yikes. The CalSavers literature says that 7.5 million state residents now have no access to a workplace retirement savings plan. So if this new law pushes millions of Californians into a pattern of saving for their retirement, then it will indeed do some good. And the hassle for employers would be teeny compared to the enormous social benefit it could provide. Charles Crumpley is editor and publisher of the Business Journal. He can be reached at [email protected].