Why California Small Businesses Should Look Beyond CalSavers for a Retirement Plan
In California, employers with 1-4 employees will be required to offer retirement benefits by the close of 2025. But the state-sponsored CalSavers program isn't the only solution. Choosing a plan that goes beyond basic compliance requirements can help affected employers deliver real value for their workforce.
California's retirement savings mandate is expanding, and the state's smallest businesses are now impacted.
A by-product of state-mandated retirement legislation, CalSavers is a retirement savings program sponsored by the State of California to help improve the financial security of Californians working in the private sector.
Since the program's phased rollout beginning in 2020, California law requires small business employers with five or more employees — that don't already offer retirement benefits — to either enroll their employees in CalSavers or sponsor a qualified retirement plan on their own. Failure to comply can result in penalties of up to $250 per employee, which are already being enforced, making this a critical business decision that demands immediate attention.
Most recently, eligible employers with 1-4 employees are required to offer a retirement plan by December 31, 2025. However, the state's retirement mandate doesn't have to mean settling for a basic state-run program. Employers may choose a private provider to better serve their business needs and implement a solution that supports long-term business success.
The true cost of a retirement state-mandated plan
CalSavers is available as a Roth individual retirement account (IRA). Employees contribute to the plan via payroll deductions on a post-tax basis and can take their savings with them if they change jobs.
But there are several significant limitations to consider:
- Restricted investment options. This one-size-fits-all approach may not align with employees' diverse investment goals and risk tolerances.
- No employer contributions. One of the biggest drawbacks is the inability to offer employer matching contributions — powerful tools for attracting and retaining talent.
- Limited employee benefits. From less flexibility in managing their retirement savings to the inability to take loans, employees face greater restrictions with state-run plans.
- Increased administrative work. Despite CalSavers being a state-sponsored program, employers still need to manage employee updates, monitor enrollment deadlines and handle ongoing maintenance tasks.
- Challenging enrollment process. The employee enrollment process isn't as streamlined as many private-sector alternatives, leading to confusion and potentially reduced participation rates among employees.
Take control of your retirement benefits strategy
While the mandate requires action, it also presents an opportunity to implement a retirement benefit that truly serves your business and employees. Private retirement plan providers like ADP can offer broader plan design options and features, including:
- Digital onboarding and automation
- Comprehensive investment options
- Employer contribution capabilities
- Loan provisions
- Higher contribution limits
- Enhanced plan flexibility, and more
A robust retirement plan offering can pay off
Recent research shows that 62% of employees (up from 56% in 2023) say their company retirement plan contributes most to their financial security. More than a third are worried that their employer may reduce or eliminate retirement benefits.*
For California small business owners, the state mandate presents an opportunity — to create a more robust and rewarding retirement plan that can aid your recruitment and retention efforts. Connect with an ADP retirement planning services specialist to learn more about enhanced retirement plan solutions.
*2024 Workplace Wellness Survey, Employee Benefits Research Institute
ADP, Inc., and its affiliates do not offer investment, tax, or legal advice to individuals. Nothing contained in this article is intended to be, nor should be construed as, particularized advice or a recommendation or suggestion that you take or not take a particular action. Questions about how laws, regulations, guidance, your plan's provisions, or services available to participants may apply to you should be directed to your plan administrator or legal, tax or financial advisor.
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