As a California small business owner, you know that state mandates require you to provide your employees with the opportunity to save for their retirement. Your two primary options include either enrolling in CalSavers, the state-sponsored retirement program, or setting up your own 401(k) plan. While both have their merits, understanding the differences between these options is key in making an informed decision that aligns with your business goals, your employees’ needs, and your own retirement planning.
Understanding CalSavers
CalSavers is a state-mandated retirement savings program for employees of California businesses that don’t offer a retirement plan. It requires employers with five or more employees to either offer a qualified retirement plan or facilitate their employees’ access to CalSavers. The key features of CalSavers are IRA structure, automatic enrollment, and Roth-only contributions.
401(k) Plan Features
A 401(k) is a defined contribution plan offered by private employers, allowing employees to save and invest a portion of their paycheck before or after taxes are taken out. Employers can also choose to contribute to their employees’ accounts. The key features of a 401(k) plan are: higher contribution limits, a pre-tax contribution option, and the ability to offer employer contributions, which can help with employee attraction and retention.
Comparing CalSavers and 401(k) Plans
Below is a table that illustrates the differences between CalSavers and a 401(k):
| CalSavers | 401(k) Plan | |
| Annual Contribution Limits (2024) | $6,500 | $23,000 |
| Catch-up Contribution Limits for ages 50 and older (2024) | $1,000 | $7,500 |
| Employer Contributions | No employer contributions allowed. | Employers can match employee contributions. |
| Tax Benefits | Post-tax (Roth) only | Pre-tax and Post-tax (Roth) |
| Administrative Responsibilities | The state handles most of the management. | Employers bear some administrative responsibility. |
| Employee Investment Options | Limited investment choices, typically low-cost index funds. | Broader range of investment options, including mutual funds, stocks, and bonds. |
| Costs | No employer administration fees. Participant annual fees ranging from 0.825 to 0.99%. | Employer fees starting at $100/month, plus participant annual fees ranging from 0.7 to 1.25%. |
Making the Right Choice for Your Busines
CalSavers is ideal if:
- You want a straightforward, low-cost way to comply with state mandates.
- You prefer minimal administrative responsibilities.
A 401(k) Plan is ideal if:
- You want to make higher contributions to your own plan, as well as help your employees to save more.
- You want to offer employer matching, for yourself and your employees.
- You seek greater control and customization of your retirement plan offerings.
Conclusion
Choosing between CalSavers and a 401(k) plan depends on your business’s specific needs and goals. While CalSavers provides an easy and cost-effective way to offer retirement benefits, a 401(k) plan offers higher contribution limits, greater flexibility, and the ability to attract and retain employees through matching contributions. Consulting with a financial advisor can help you navigate these options and implement a retirement plan that best serves your business and your employees.
Need Help Deciding?
As a retirement plan advisory firm, we are here to help you weigh the pros and cons and make the best choice for your business. Contact me to schedule a consultation and learn more about how we can create a tailored retirement plan strategy that aligns with your goals and values.