Here’s a link to a Power Point from the Nov. 17, 2021, Carlsbad Chamber 401k workshop. This tells you all you need to know in a compact fashion.
CA companies with 5-49 employees must have a retirement plan in place by June 30, 2022.
Seems like a long way away but consider 1) it takes time to get a plan in place and 2) the providers that deliver these plans/platforms - the Small Business Retirement Plan Supply Chain - including and especially the California government’s CalSaver solution - will be overrun in 2022 Q1 and Q2 - maybe sooner! I see this video when I think about the “rush” that will occur in the first half of 2022.
Latest State of California data (Q4, 2020) shows that almost 22% (260k+ companies) of California companies are 5 to 49 employees in size with more than 3.4M employees. If we assume that all companies 20-49 in size already have a plan and look at the remaining companies with 5-19 employees, that leaves 17.5% of the CA companies, 210k companies with 1.9M employees that need to get plans in place in a few months! The video above may be close to reality as the Supply Chain is swamped with more than 200,000 companies.
Providing a retirement plan is a serious matter - an employer makes decisions to get a plan in place which significantly impacts how much money the employee population can save (and grow) for retirement. It is a serious fiduciary responsibility. It’s like starting a bank that could determine your employees’ quality of life in their later years. That is a huge responsibility.
Since your firm is small - you should just gather your team together and ask them a few questions. Their answers will guide you. At the same time - it’s a starting point. The company and its makeup of employees constantly change and three years later several assumptions could have changed. Keep in mind that the plan that has the greatest flexibility is a 401(k) plan which is why they are so widely prevalent.
What’s your interest in saving for retirement through a company retirement plan?
How important is a company match to you?
How much do you want to save annually? Considering the following limits for people under 50/over 50. what is your aim? CalSavers 6000/7000, Simple IRA 13,500/16,500, 401k 19,500/26,000?
What’s more important to you - saving your money pre-tax, post-tax (Roth) or do you want to have both options?
For the owners. Are you interested in matching or want to avoid? Would you like to have the option to share profits into the plan after a great year?
For all these questions I would add on the following clarifying question - “How do you see your preference changing over time?” Below I will give some Q&A answers that help you either solidify what you want or rule out what you don’t want.
Bottom line - the 401(k) offers the greatest flexibility in features and capability. It is also a little more complex. In our opinion the “Aggregation” type 401(k) offers the best of the 401k world - lower costs, lowest liability.
You can read more about the “aggregation advantage” at this blog post.
If a key employee(s) or owner says - then….
It’s really important to me (age over 50) to save $26,000/year to close the gap in my retirement planning. Then choose 401k.
I not only want to save, I want to shelter income from taxes as my wife and I are doing pretty good on total income. Then don’t choose CalSavers which is post-tax Roth only. If he wants to contribute more than the Simple IRA allows then it also rules out Simple IRA.
I can’t contribute much and I pay almost nothing in income taxes - I like the Roth. Then CalSavers may be OK - and 401k also works. Rules out Simple IRA which is pre-tax only.
Owner says: Right now I am limited on the ability to match or profit share, but I feel quite confident that our growth will put us in a position to do both, soon. Then go 401k. You can start with no match. Add a match when you can. and then after strong years, do profit-sharing.
I’m an owner who sacrificed everything early on and now need to save as much as possible. Then 401k because they can offer a safe harbor match, contribute the max and then offer a profit share after good years.
Employees are mainly interested in pre-tax contributions and would like matching. None need the top end contribution limits of a 401k plan. Owner feels the 3% match is do-able. Then go with the Simple IRA. Later you can get together and those Simple IRA accounts into a 401k plan if needs change. CalSavers does not allow matching, profit-sharing or pre-tax.
What are other retirement plan other options that haven’t been mentioned? They were not mentioned for good reason as you will see.
SEP IRA - “simple employer pension”. This fits the situation of a partnership where all partners and employees are family. Unlikely to fit for 5-49 employees but possible. It is an employer funded plan only. The same percentage of base salary must be paid by the company into the account of every eligible employee.
Solo 401k - If “no employees” other then the owner and their spouse - this fits. Won’t work with 5 employees or more.
403(b) - Equivalent to a 401k plan and available to educational and health related organizations.
457(b) - Special to city and state government organizations only.