On July 1, private sector employers in California gained access to an innovative new program that enables them to facilitate retirement savings for their employees. In a state where half of all private sector workers do not have a retirement savings account or participate in a pension, CalSavers stands to make a significant difference in the lives of everyday workers.
The program couldn’t be simpler. Workers are automatically enrolled in individual retirement accounts (IRAs) with a default savings rate of 5% of their paychecks. They have the ability to opt out at any time or set a different contribution amount within the annual contribution limits of IRAs, which is $6,000 a year for savers under age 50 and $7,000 for people 50 and over.
CalSavers is now available to all California private sector employers with five or more employees that do not offer a qualified alternative retirement plan, with a requirement for employers to make either the state’s program or a private sector alternative available to their employees. The employer deadlines are phased in based on employer size, starting with those with more than 100 employees — they must register with CalSavers by June 30, 2020, if they do not already offer a plan to their workers. However, employers may join at any time before their scheduled registration deadlines.
This landmark program won’t just benefit Californians; it changes the retirement landscape in important ways nationwide: When the largest state enacts innovative new policies, lawmakers and the financial services industry sit up and take notice. Here are nine ways it will change the retirement savings landscape.
1. It helps millions of Americans better prepare for retirement
Approximately 7.4 million California workers don’t have access to an employer-sponsored retirement savings option. When employees have simple choices for contributing to savings from their regular paychecks, research shows that they are 15 times more likely to save and start on a path to greater retirement security.
More than three-quarters of low-income and one half of middle income workers in California have no retirement assets at all. Although the national retirement savings crisis won’t be solved overnight, facilitating access and offering millions of workers a way to begin to save using a simple, low-cost IRA goes a long way toward making a difference in addressing the problem and it is better than not saving anything at all.
2. It makes small businesses competitive
Small businesses often struggle to provide their workers with the same benefits as larger companies with which they compete for talent. The time and costs associated with traditional retirement savings plans — not to mention the regulatory burden — can often discourage small employers from setting up even basic plans.
CalSavers will make it easier for the 250,000 California employers that do not currently provide retirement savings programs to their workers. Providing easy access to simple, cost-effective solutions for small businesses will make this lifeblood of the American economy more able to compete in the search for the best possible talent.
3. It allows employees to be more mobile
Employees ought to be able to change jobs without having to worry about what happens to their retirement savings. That’s exactly the approach that CalSavers takes by making the accounts employee-owned and portable from one job to the next.
Being able to keep and use a CalSavers account if someone moves between jobs will be easy and helps make sure that workers don’t have to worry about losing track of small retirement savings accounts or figure out what to do with those accounts if they change employers.
4. It recognizes the value of ‘gig workers’
As the state that arguably gave birth to the “gig economy,” it seems only fitting that California would take steps to meet the needs of this often-overlooked portion of the workforce. Starting in September, self-employed and gig workers will be able to sign up for CalSavers directly.
This important step forward ensures that the benefits enjoyed by workers and consumers alike as part of the gig economy will not be dampened by the lack of access to a retirement savings plan.
5. It benefits underserved populations, especially Latinos
The lack of access to retirement savings crisis hits some communities disproportionately, but perhaps none harder than often-underserved populations. In California, almost half of the 7.4 million workers — 3.5 million — who will benefit from CalSavers are Latino.
Latinos find themselves in jobs without retirement savings programs at a much higher rate than white Californians. In fact, 61% of Latinos in the state don’t have access to employer-sponsored retirement plans, as compared with 40% of whites. CalSavers will help reduce the disparity by increasing access.
6. It reduces the burden on state and federal budgets
When Americans retire without having set aside enough savings to live on, it can have a significant impact on government budgets. Economically disadvantaged seniors must turn to public programs for support to make ends meet, putting additional pressure on taxpayers.
The simplest solution lies in helping Americans to better prepare for their postwork years by making retirement savings simple and convenient. With 48% of Californians having no retirement savings assets today, CalSavers can significantly contribute to reducing the future rate of growth of government assistance programs for seniors.
7. It provides a model for other states
The substantial size of the California market makes it impossible for others to ignore and often enables it to serve as a template for other states to embrace. With the magnitude of the existing challenge, having a state like California to study and use as a model is likely to improve retirement solutions far beyond its borders.
Although other states have adopted similar legislation, the California approach will uncover valuable new lessons more easily because of its scale. As one of the first states to launch such a program, California’s experience will also enable other states to learn from and improve the design of programs and products offered across the country.
8. It will inspire further innovation
As CalSavers enables more workers to begin setting aside funds for retirement for the first time, it will create a new generation of savers. This should open the door for the financial services industry to develop new solutions to meet their needs and better prepare all Americans for their postwork years.
For example, there is already pressure to improve financial education and make lifetime income solutions more readily available. Greater innovation will help improve outcomes for Americans in their golden years.
9. It creates new opportunities in the private sector
Helping more workers save for retirement creates new opportunities for the financial services industry to help those workers manage their growing savings, such as moving beyond CalSavers into 401(k) employer-provided retirement savings plans.
In addition, because employers now must offer their workers access to a way to save, it challenges plan providers to design and offer simpler, more-cost-effective plans to employers that may want to sponsor their own more-robust 401(k) plan now or in the future.
Transforming the retirement savings landscape
While there is still much to be done to significantly improve retirement security, new state- facilitated retirement savings programs like CalSavers are providing important and much-needed opportunities to drive the transformation of the retirement savings landscape for the better.
The scale of the CalSavers program will make a meaningful difference for residents of the largest state while providing valuable models and lessons to guide future action for the rest of the nation.