Small businesses in California face a growing challenge, balancing compliance with the state’s retirement-savings mandate while managing costs and administrative tasks. The CalSavers Retirement Savings Program was designed to make retirement savings accessible to employees of businesses that do not already offer a qualified plan.
But while the program simplifies compliance, it also comes with limitations that business owners should understand before relying on it long term. Here’s an in-depth look at the pros and cons of CalSavers and what it means for small business owners.
What Is CalSavers?
CalSavers is a state-run Payroll Deduction IRA program that requires California employers with five or more employees to offer a retirement savings option. Employees are automatically enrolled in a Roth IRA at a 5% contribution rate, which automatically increases by 1% each year until it reaches 8%.
Employers do not contribute to these accounts, but they are responsible for setting up payroll deductions and maintaining employee rosters. While this program helps employees start saving, it may not offer the same flexibility or advantages as employer-sponsored plans such as 401(k)s or SIMPLE IRAs.
The Pros of CalSavers for Small Businesses
1. No Employer Fees Employers can offer CalSavers at no direct cost. The state covers the administrative management, so business owners avoid the typical setup or maintenance fees that come with private retirement plans.
2. No Fiduciary Responsibility CalSavers removes the legal and financial responsibility of plan management. Employers are not fiduciaries, meaning they aren’t responsible for investment decisions or plan performance.
3. Simple Compliance Solution For businesses that don’t yet offer a retirement plan, CalSavers provides a straightforward way to meet California’s legal requirements without additional paperwork or complex filings.
4. Employee Empowerment Employees gain access to a retirement savings account in their own name. They control their
contribution rates, can opt out anytime, and choose how their funds are invested. This gives them independence and financial security.
The Cons of CalSavers for Small Businesses
1. Limited Employer Control Employers cannot customize plan features, offer matching contributions, or provide more advanced benefits. This can make CalSavers less attractive for employee retention and recruitment.
2. Lower Contribution Limits CalSavers operates as an IRA, which means annual contribution limits are lower than those of 401(k) plans. For 2025, IRA contributions are capped at $7,000 ($8,000 for those 50 and older), compared to $23,000 for 401(k)s.
3. No Employer Match One of the most valuable features of an employer-sponsored retirement plan is the ability to match employee contributions. CalSavers does not allow employer matching, limiting its appeal as a competitive benefit.
4. Administrative Duties Remain Although employers aren’t fiduciaries, they still must handle payroll deductions, manage employee opt-outs, and maintain accurate rosters. For very small businesses, even these tasks can take time and resources.
5. Potential Penalties for Non-Compliance Employers who fail to register for CalSavers or implement an alternative qualified plan may face state penalties. Staying compliant is essential to avoid unnecessary fines.
The Hidden Costs of CalSavers
Although CalSavers is promoted as a no-cost option for employers, there are still indirect and employee-related expenses that business owners should understand.
1. Employer Administrative Costs While there are no setup or maintenance fees charged by the state, employers are responsible for managing payroll deductions, maintaining employee rosters, and ensuring ongoing compliance. These administrative tasks require time and attention that can translate into real operational costs, especially for small businesses without dedicated HR staff.
Employers who fail to register or remain noncompliant with state requirements may face penalties of up to $250 per eligible employee after 90 days, increasing to $500 per employee after 180 days. Additionally, employers who use third-party payroll providers to manage CalSavers contributions may incur additional service fees from those vendors.
2. Employee Account Fees CalSavers accounts come with fees that, while charged to employees, can impact long-term savings and overall satisfaction with the program. Each participant currently pays an annual flat fee of $18 (or $4.50 per quarter) plus an asset-based fee ranging from 0.325% to 0.49% of their account balance each year, depending on their chosen investment options.
For example, an employee with a $10,000 CalSavers balance could pay approximately $67 annually in fees. These costs are deducted directly from investment returns, reducing overall retirement savings growth.
3. Missed Tax Advantages Because employers cannot make matching contributions under CalSavers, they also miss out on potential tax deductions available through employer-sponsored plans like 401(k)s or SIMPLE IRAs. Over time, this can represent a meaningful loss of opportunity for both the business and its employees.
In short, while CalSavers removes upfront financial barriers, it’s not entirely cost-free. Understanding these hidden costs helps business owners make informed decisions about whether to stick with the state-run plan or explore more flexible private retirement options.
Why CalSavers Isn’t Always Enough
While CalSavers helps businesses meet legal requirements, it doesn’t always align with long-term business or talent strategies. For employers aiming to attract and retain skilled employees, offering a more robust plan like a 401(k) or SIMPLE IRA may be a better solution.
A custom retirement plan allows for higher contribution limits, potential employer matches, and greater investment flexibility, features that show employees you’re invested in their financial future. For many
business owners, upgrading beyond CalSavers is not just about compliance; it’s about building a competitive advantage.
Opportunity in Simplicity
The simplicity of CalSavers can be a good starting point for small employers. It allows them to provide a retirement option quickly, without significant cost or risk. However, as a business grows, so should its benefits strategy. Transitioning from CalSavers to a more comprehensive plan gives owners greater control and helps employees save more effectively for retirement.
By understanding both sides of the equation, employers can make an informed decision that aligns with their goals, values, and budget.
How Scout Wealth Management Can Help
At Scout Wealth Management, we help business owners navigate California’s retirement plan landscape and determine whether CalSavers is the best option, or just the first step. Our team specializes in creating customized retirement solutions that fit your company’s size, goals, and financial strategy.
We can help you compare CalSavers with other retirement plans, evaluate costs, identify tax advantages, and ensure your business remains compliant with state mandates.
Take the Next Step Toward Smarter Retirement Planning
Choosing the right retirement plan can shape your company’s future and your employees’ financial well-being. If you’re uncertain whether CalSavers is the right fit for your business, Scout Wealth Management can help.
Contact Scout Wealth Management today to schedule a consultation. We’ll help you explore your options, maximize benefits, and design a retirement plan that supports both your business and your employees for years to come.
