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Employer Retirement Plans: Creating a Retirement-Ready Nation.

because California businesses reach across the United States, it's important for CPAs to have an understanding of the developing stale-sponsored retirement programs in states where your clients have employees.

The state-sponsored retirement programs in America have their genesis around the 2008 election cycle when the Heritage Foundation, Brookings Institute, AARP and other constituencies worked together to craft an opportunity for Americans without retirement savings options at work. Each political party agreed to, regardless of who won the election, support a mandatory IRA program at the federal level for employers who do not offer a retirement plan for their employees. As time progressed, the agreements regarding the federal program waned.

In 2016, then-California Sen. Kevin de Leon introduced, and Gov Jerry Brown signed into law, SB 1234. The bill legislatively enacted the Califonia Secure Choice Retirement Savings Trust Act, which was part of 2012 legislation introduced by de Leon. Since the law was enacted, more than 40 states arc in various stages of legislation that will help employees of employers save for retirement.

Types of State Plans

* Automatic Enrollment Payment Deduction IRA (Mandatory for Employers): California, Oregon, Illinois, Maryland, Connecticut, Seattle

* Payroll Deduction IRA (Voluntary for Employers): New York

* Voluntary Marketplace Plan: New Jersey, Washington

* Voluntary Multiple Employer Plan (MEP): Vermont

Common Features of Plans

* Automatic enrollment default contribution rates of 3 percent to 5 percent of income.

* Automatic escalation of 1 percent, with varying caps.

* Generally eligible to rollover to an IRA or employer plan.

* Recordkeepers and fund managers are selected by process.

* Non-compliance costs for employers.

* Eligibility varies by state. (Refer to the links in the resources section for requirements.)

* States generally allow hardship distributions.

For multi-state employers, the number of employees is based on the company's Employee Development Department filings with the state. What this means to multi-state employers is that requirements in states that have implemented plans will vary by state, not based on the employer's total employee count, but rather, only employees that earned a wage in the respective state.

California CalSavers Update

CalSavers ( is mandatory in California for employers with five or more employees who do not have a retirement plan. A profit sharing only plan is not sufficient to opt out of the California program.

As of Nov. 19, 2018, CalSavers was officially opened on a limited pilot basis. The program will open fully statewide on July 1, 2019, followed by three staggered deadlines for compliance based on employer size.

Employers with more than 100 employees must register by June 30, 2020; employers with more than 50 employees must register by June 30, 2021; and employers with five or more employees must register by June 30, 2022.

The program is voluntary for employees, but they will be automatically enrolled if they don't opt out within 30 days of receiving the information packets from the CalSavers program, which happens immediately upon their employer registering and uploading the employee roster to CalSavers.

Employers must remain neutral about their employees' participation. It is important to remember that employers need not wait for their deadline year, and can participate any time after July 1, 2019. Employers interested in serving in the pilot may indicate interest at

Account Type

The default setting for CalSavers is a Roth IRA, and a Traditional option will be available for the full launch in 2019. A Roth is beneficial for a couple of reasons; the majority of participants will likely be in the lower tax brackets and may benefit from a tax-free Roth IRA, and those who save that are approaching 70 years of age would not need to receive a Required Minimum Distribution.

CalSavers will have automatic enrollment default setting start at 5 percent of income, subject to automatic increase of 1 percent each year, capping at 8 percent. Employees may choose their own rate or opt out at any time.

Enforcement for Non-compliance; California

While the employer bears no fiduciary or ERISA responsibilities under CalSavers, your clients cannot ignore its requirements. As a CPA, you can help your clients understand the consequences--including fines--and avoid missing opt-out forms.

State IRA plans do not fall under ERISA

An employer under a state ira plan is not:

* A fiduciary

* Responsible for employee decisions

* Responsible for investment decisions

* Responsible for investment performance

Why is a State IRA, Marketplace--or MEP Program--Important?

Quite simply, not enough Americans are saving for retirement. The smaller the business size, the fewer the number that have plans available to their employees. Figure 1 identifies retirement plans availability in the marketplace.

The metrics can vary by state. There arc many benefits that occur when a broader population is on track for retirement. Projected cost reductions to society in retirement can be a significant benefit. In the short term, perhaps the state IRA program best addresses the shortfalls in the marketplace as it applies to retirement savings, due to the use of behavior finance options that have been shown to have high levels of success.

How to Make State Programs Better

While it is well documented that very high percentages of the population do not have access to an employer plan where most employees can effectively save, there are opportunities to work in concert with plans that are in force to preserve the leakage that occurs when employees move from one company to another.

Leakage refers to plan documents that allow a cash-out of participant balances below a stipulated account value paid to the participant of the plan.

If the average number of jobs that one holds is anywhere close to the 17 that has been cited in some sources, then the constant revolving door of retirement savings into the participant's pocketbook to spend after leaving their firm defeats the purpose of good savings principles. However, through proper regulation and legislation, the leakage out of an individual's retirement savings could be curtailed.

One solution is to have the retirement savings of an individual not sent to the participant, but to transfer the savings to:

* The subsequent company if there is a retirement plan;

* An individual IRA; or

* In cases where balances are too small to be transferred to an IRA when the subsequent employer docs not have a retirement plan, to allow those funds to be transferred to a state IRA.

Metrics should also be considered to allow for a proper communication of success of the state IRA programs. For instance, while actual outcomes cannot be certain, common metrics in the advisory industry include assets under management, average account balances and estimated piles of money at retirement

But what does that mean to the average saver? Effective participant statements detailing estimated retirement income per month means more to participants, and a simple color-coded amount that would show if the participant is on track for retirement.

Simple reporting mechanisms could also lead to greater acceptance at the state program level.


Leonard C. Wright, CPA/PFS, CGMA, CFR CLU, ChFC is a member and past chair of the CalCPA Personal Financial Planning Committee and a member of the AICPA PFP Credentialing Committee, Member Retirement Plan Committee and Money Doctor at You can reach him at
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Title Annotation:financial planning
Author:Wright, Leonard C.
Publication:California CPA
Geographic Code:1U9CA
Date:Jan 1, 2019
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