Earlier this week, President Obama directed the Department of Treasury to create a new, government-back retirement account dubbed “myRA.” It aims to help lower-income Americans begin saving for retirement who are not covered by a plan at work. So the question is, “will it work,” or is the concept of “myRA” simply a nice talking point to include in a political speech? The answers are no and yes, although I agree with the President that we need to help all Americans save more so they can retire successfully. Here’s a brief overview of how a myRA will work:
- Employers can set up these accounts without cost and don’t have to contribute to them.
- The account will basically work like a Roth IRA – money goes in after-tax and can be withdrawn tax-free in retirement.
- Like a Roth-IRA, contributions can be made up to $5,500 annually, and the same tax/penalty rules apply.
- The accounts will be solely invested in government savings bonds (paying historically low yields) and are principal protected (meaning they cannot lose value)
- The accounts are portable, meaning they can be kept when switching jobs
- There are no administrative fees
- Once an account reaches $15,000 or is open for 30 years, it becomes a Roth IRA.
- Initial investments can be as low as $25 and as little as $5 for subsequent contributions.
Sounds nice, but will it work? In my opinion, there are several issues, namely that the types of people these accounts target (lower-income and part-timers) don’t make enough money to save. With no automatic enrollment requirement and no required employer contribution, what is the incentive to contribute? These workers’ issue is the same even when a plan at work covers them, even if the employer makes a matching contribution – they either don’t have the money to save or don’t join the plan because of inertia. The ONLY thing that can get these people to participate is automatic enrollment. Also, it’s ironic that a myRA basically flies in the face of the Pension Protection Act of 2006 (PPA). Under PPA, companies were encouraged to adopt automatic enrollment, automatic escalation, and a “qualified default investment alternative” suitable for long-term retirement savings (such as a target-date fund, balanced fund, or managed account – but not a principal-protected bond fund). The myRA approach includes none of these things.
I applaud the President for his intent with myRAs, but the devil is in the details like many things (political and otherwise). Given that these workers could open a Roth IRA, do we really need another type of retirement account? While some companies may adopt these, I fear the utilization rate will remain very low.