California joins states requiring employers to set up employee IRAs

About 7.5 million
Californians don’t have access to employer-sponsored retirement
plans right now.
Art_Photo/Shutterstock

• CalSavers, a new
  state-sponsored retirement savings program in California,
  requires employers without a company-sponsored retirement plan
  to offer employees a Roth IRA.
• A Roth IRA
  allows you to save after-tax earnings now and withdraw the money
  tax-free during retirement.
• CalSavers plans will roll out over the next three years,
  beginning in July 2019, with different deadlines for
  different-sized companies.
• There are similar programs in place in Connecticut, Maryland,
  Oregon, Illinois, and Seattle.

Saving for retirement
is about to get easier for millions of Californians. 

Beginning next summer, workers at any California company
with more than 100 employees and no employer-sponsored retirement
plan will be able to contribute part of their paycheck to an
individual retirement account (IRA) through a new program
called 
CalSavers
.

The program is currently in its pilot phase and is only
offering Roth
IRAs, but will expand to include traditional IRAs sometime in
2019.

A Roth IRA, or individual retirement account, allows you to save
some of your after-tax earnings now and withdraw the money during
retirement
tax free. A traditional IRA is the opposite: Anything you
contribute now won’t be taxed, but it will be on the
backend. 

Roth IRAs are often
recommended by financial experts for average earners because
of the tax savings: You’re only taxed on your initial
contributions to the account, not on the money you withdraw
(which includes years of tax-free investment earnings).

In 2019,
the IRS says you can contribute up to $6,000 to an IRA
(that’s total, for a Roth and Traditional IRA) if  your
adjusted gross income is less than $122,000 as a
single-filer or less than $193,000 if you’re married and filing
taxes with your spouse. If you’re 50 or older, the
limit rises to $7,000. 

Samantha Lee/Business Insider

To be clear, anyone can open and contribute to an IRA and it
doesn’t have to be facilitated by your employer, like a 401(k)
does. But according
to research from AARP Public Policy Institute, American
workers are 15 times more likely to contribute to a retirement
plan when it’s operated by their employer in the form of an
automatic payroll deduction — and some 55 million Americans don’t
have this option.

CalSavers is the state’s solution to closing this gap.
Similar mandatory
IRA-enrollment programs have been enacted in Connecticut,
Maryland, Illinois, Oregon, and Seattle. 

By July 2019, California companies with more than 100
employees and no employer-sponsored retirement plan must be
registered with CalSavers, which gives employees the option to
choose their Roth IRA contribution rate, opt out of saving
entirely, or do nothing and be auto-enrolled to contribute 5% of
their income. There’s also an option to auto-increase the savings
rate by 1% each year, until it reaches 8%.

The deadlines for companies with 50 or more employees and five or
more employees are July 2020 and July 2021, respectively.
CalSavers estimates the program will reach more than 7 million
Californians.

According to a UC
Berkeley Labor Center study, the typical 25-year-old who
participates in the CalSavers program will save enough to
generate about $7,000 in annual retirement income. That more than
likely won’t cover the average person’s post-retirement expenses,
but it’s a start.

The annual asset-based fee for Roth IRAs in the CalSavers program
— which is managed by Ascensus College Savings
Recordkeeping Services (ACSR) — is
between 0.825% to 0.92%, depending on investment
choice.

At the outset, employees can choose
to invest their money in a capital preservation fund, a
bond fund, a global equity fund, and a suite of target date
funds. The first $1,000 in contributions for each member will be
invested in a capital preservation option.