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Nest Egg Building Just Got Easier

Nest Egg with money
Sharon Meredith

By Laura Mecoy

Red Bay Coffee Roasters opened in Oakland five years ago with a commitment to offer more than just great coffee—it wanted to help its employees invest in their future.

That’s why the company signed up in January with a pilot version of the workplace payroll-deduction CalSavers Retirement Savings Program.

Already, more than 70 percent of its 31 workers are investing a percentage of their paychecks through CalSavers, even though most of them live in the high-cost Bay Area, said Kenitra Dominguez, the company’s director of people and culture. “For most of our employees, this was the first time they had ever saved for retirement,” she said.

A law enacted in 2016, with the support of AARP California, established the program, which goes into effect statewide on July 1. Nine other states already have similar programs.

“Unfortunately, nearly half of working Californians are on a trajectory of retiring into economic hardship, if they retire at all,” said CalSavers Executive Director Katie Selenski.

An estimated 7.5 million residents work for employers with no retirement savings program. But AARP research shows that employees are 15 times more likely to save for retirement if they have access to payroll-deduction plans.

CalSavers is a “game changer” for small businesses, explained Mark Herbert, California director of Small Business Majority, because it helps “level the playing field for the many small firms that lack the resources to enroll their employees in a retirement savings program.”

A new way to save money

Starting July 1, the state will require employers that don’t offer retirement plans to begin registering for CalSavers.

Businesses with 100 or more employees must be registered by June 30, 2020. Companies with 50 or more employees must register by June 30, 2021. And those with five or more workers must register by June 30, 2022.

CalSavers is starting with larger businesses because they are likely to have systems that make it easier to process paycheck deductions for retirement funds. Employers pay no fees for CalSavers, and workers must opt out if they don’t wish to participate. Selenski said the state chose this approach because studies show that savings rates are greater with automatic enrollment.

CalSavers sets the payroll deduction at 5 percent of gross pay, to be invested in Roth individual retirement accounts (IRAs), but employees can raise or lower that contribution.

Workers can save up to $6,000 annually or $7,000 if they are over age 50. They can also take their savings with them when they leave their employer.

Roth IRAs are after-tax accounts, so employees can withdraw what they have contributed at any time without penalty; however, they must pay taxes on the earnings from their investment if they are under 59½.

For Red Bay, Dominguez said, the flexibility to withdraw savings without penalty is important. An employee might need to tap funds for a large expense, like a down payment on a home.
“CalSavers will allow businesses to offer employees the opportunity to save for their futures,” she said.

For more on the program, go to calsavers.com or call 855-650-6916.

Laura Mecoy is a writer living in Los Angeles.

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