In California, any business with five or more employees must offer a retirement plan. On December 31, 2025, this will change to any business that has at least one worker. If your company doesn’t have an existing retirement plan, California has set up CalSavers as an alternative option. Before you sign your workers up for this plan, it’s important to take a moment to consider all of the benefits and drawbacks of using CalSavers. 

How CalSavers Works 

CalSavers is California’s retirement plan for businesses that don’t already have their own retirement plan in place. It is a Roth individual retirement account (IRA), so contributions are made using post-tax dollars. For employees, it was designed to reduce the coverage gap and give workers more ways to save for retirement. Meanwhile, employers can benefit from having an easy, cost-effective way to comply with California’s retirement plan requirement.

Once CalSavers is set up, workers are automatically signed up with a 5% contribution rate. CalSavers includes a 1% auto-escalation, with a maximum contribution rate of 8%. If workers don’t want to make contributions, they must opt-out within 30 days of their hiring or eligibility date.

When Are You Required To Offer CalSavers to Your Employees?

Employers are required to offer CalSavers or an alternative retirement plan after they have at least five employees. Starting at the end of 2025, employers will need to provide some type of retirement plan as soon as they have just one employee. 

However, employers aren’t specifically required to offer CalSavers. According to California law, employers have the option to choose which retirement plan they offer. They are only required to offer CalSavers if they don’t already have an alternative to give their workers. 

Once you are large enough to legally need retirement plans for your workers, the state will send you a notice if you haven’t enrolled in a plan. If you don’t comply with the notice within 90 days, you’ll be fined $250 per employee. An additional $500 fine is added per worker if the retirement plan requirement isn’t met within 180 days.

The Benefits and Drawbacks To Offering CalSavers at Your Small Business

CalSavers is an easy solution for small businesses that struggle to choose and administrate a retirement plan for their employees. However, it does carry some drawbacks. Unfortunately, it features fewer investment options and allows workers to contribute less than other plans. While employers have minimal costs associated with the plan, employees have to pay annual administrative fees out of their investments.

There are many different types of top retirement plans available for small businesses. Before settling for any particular plan, it’s essential to review some of the advantages and disadvantages involved with each option. 

The Benefits of CalSavers for Small Businesses 

When it comes to CalSavers, there are a few key advantages that benefit your small business. From convenience to potential tax deductions, CalSavers can help you make the most of your company’s retirement plan.

Free for Employers

One major advantage of CalSavers is that it is free for employers. While employees have to pay fees, CalSavers is completely free for employers. Your main costs will be the initial labor hours used to set it up. 

Tax Credits and Deductions

CalSavers can help you take advantage of tax credits and deductions. Under SECURE Act 2.0, you can get administrative costs covered by your retirement plan. This credit is available for up to $250 per person, with a $5,000 maximum.

Convenience

For some small businesses, comparing administrative costs and navigating different plans can be challenging. With CalSavers, employers don’t have any fiduciary duties and the administrative burden is minimal.

No Employer Matching Contributions

If you don’t have the funds to provide matching contributions, CalSavers may be a good option. This plan only receives employee contributions, so it isn’t possible to make contributions as an employer.

The Drawbacks of CalSavers for Small Businesses

While there are benefits to using CalSavers, there are also some significant disadvantages as well. Because of this, it’s always a good idea to get professional advice about the best retirement plans for your small business.

Possibly Higher Costs for Your Workers

For your workers, CalSavers may cost more than alternative retirement plans. Typically, employees have to pay an administrative fee of 0.83% to 0.95%. This means a $100,000 investment would have an annual administrative fee of $830 to $950. While this isn’t the worst administrative fee on the marketplace, there are some retirement plans that charge less.

Income Limits 

With a Roth IRA, the maximum contribution is $7,000 per year. If the employee is age 50 or older, they can make an extra catch-up contribution of $1,000. This is significantly less than 401(k) plans, so your workers may want a plan with a higher contribution limit.

 

Additionally, Roth IRAs have income limits as well. A single individual can no longer contribute if they earn more than $165,000 per year. For married couples filing jointly, the maximum income limit is $246,000.

Limited Investment Options

While there are a couple of different investment types people can choose from, the options are fairly limited. If the employee doesn’t select a specific investment type, they will automatically be enrolled in the CalSavers Target Retirement Fund. The following are the current investment options available through CalSavers.

• Target Retirement Fund
• Sustainable Balanced Fund (Environmental, Social, Governance)
• Global Equity Fund 
• Core Bond Fund
• Money Market Fund

No Employer Matching Contributions

Unlike a 401(k) plan, you are not allowed to make employer contributions. For employers who don’t want to provide matching contributions, this may be an advantage. However, it’s a significant drawback if you want to reward your employers and provide an in-demand benefit.

Lack of ERISA Protections

The Employee Retirement Income Security Act of 1974 (ERISA) set standards for health plans and retirement accounts in the United States. It requires fiduciary oversight for retirement plans, ensuring employees are protected from negligence and fraud. However, federal, state, and local governments are not bound by ERISA. As a result, CalSavers doesn’t have any ERISA protections.

Higher Administrative Burden

While CalSavers may be managed through the state, you’ll still need to handle employee updates, manage administrative tasks, and remember enrollment deadlines. Because of this, you may want to consider a private retirement plan that matches your company’s administrative needs.

Additional Enrollment Effort

In addition to handling other administrative tasks, you will also need to manage employee enrollment. Unfortunately, the CalSavers plan’s enrollment can be challenging to navigate at first. You may be able to find private retirement plans that have more streamlined enrollment options.

Set Your Workers Up for a Secure Retirement

When deciding whether to accept a new position or remain at an existing job, 62% of workers will consider the position’s retirement benefits. Employees want a company that cares about their financial well-being, so they are more likely to choose a business that offers a retirement plan. If you own or manage a business in California, you also have a legal requirement to offer a retirement plan. CalSavers is a useful option for many businesses, but you should carefully consider if this plan is right for your company’s needs.

 

To find out more about retirement plan options for your small business, reach out to our team of small business payroll and HR experts today.