Mr. Speaker, the President of the United States
In his 2014 State of the Union Address this past January, President Obama offered more Americans, particularly those who are low- and middle-income, the opportunity to save for retirement through payroll deductions with a plan for new government-sponsored savings accounts. This new kick-start retirement savings program is called “MyRA,” and is similar to individual retirement accounts. MyRA plans will provide “a new way for working Americans to start their own retirement savings,” Obama said. The program will only be available to those workers who don’t have access to an employer-sponsored savings plan now i.e., 401(k). The President can establish the savings program under existing executive authority without new legislation. To share a little history with you, the new proposal resembles an earlier Obama Administration savings plan (found in his 2014 Budget and costing the government an estimated $18 billion in foregone revenue over ten years) that would have required employers to offer an automatic IRA option to all employees.
What’s It All About…. Barack?
Well, the MyRA savings plan would have the same tax treatment and follow the same withdrawal rules as a Roth IRA, but there are some notable differences. In short, workers could open their accounts with as little as $25.00, and make automatic contributions through payroll deductions in amounts as small as $5.00 per month. Enrollment in the plan would be voluntary, and tax-free withdrawals could be made at any time without penalty. While I certainly agree that more people need to be saving for retirement, this is beginning to sound like an awful lot of paperwork and administration for a plan that’s beginning to seem more akin to a Christmas Club Savings Account. MyRA's will only have one investment option: The Treasury will create a security fund modeled after the federal employees’ Thrift Savings Plan Government Securities Investment Fund – paying a variable rate. That specific fund posted an average annual return of 2.69 percent for the five years that ended in December 2012. By the way, the average annual inflation rate for that same period was 2.06 percent – adjusting for inflation the investment averaged a return of 0.63 percent per annum. (see also)
MyRA accounts would be available to married couples with modified adjusted gross incomes up to $191,000.00 per year, and individuals earning up to $129,000.00 annually. Once the MyRA reached $15,000.00, or after 30 years, they would have to be rolled over into a private sector Roth IRA.
Think of MyRAs much like a U.S. Government Bond – true, you won’t lose your principal invested, but you won’t build up savings quickly either because of the low rate of interest. Individuals receive no tax break for investing in these accounts, and employers will not have any responsibility for these accounts because the government will run them.
MyRA versus 401(k)
For both employers and employees, MyRA accounts differ from the more familiar 401(k) savings plans:
• No employer matching contributions
• No opportunity for high-yielding returns
• No track record of employer support
• Only one investment option – the basket of government bonds available to federal workers in their retirement plans with maturities between 4-30 years.
• Guaranteed return of principal
• Ability to withdraw funds at any time – with no tax penalty.
Employers who choose to participate by the end of this year will initially offer these new saving accounts via a pilot program. They are meant to cost employers little or nothing to create since they will neither administer the accounts not contribute to them. One last caveat – employers are not required to offer them.
The Good, the Bad and the Ugly
The aim of the program is to hopefully encourage millions of people to start feathering their nest so that they can supplement Social Security benefits. Chip Castile, Managing Director and head of the U.S. Retirement Group at BlackRock, Inc., endorsed the President’s proposal by stating that, “We’re going to have more people talking about the retirement crisis, which is important.” “It’s a step in the right direction,” said Robert Reynolds, CEO of Boston-based Putnam Investments. “I don’t think anyone thinks this is going to magically turn us into a nation of savers,” said William Gale, Director of the Retirement Security Project at the Brookings Institute in Washington. “But for a particular group it seems like it could be part of the solution.” The Vanguard Group and Fidelity Investments both “look forward to reviewing the details of the President’s program.”
Many believe that the voluntary sign-up will undermine the program – people will procrastinate and they won’t sign-up. Others believe that it should be mandatory and allow the participants the ability to opt out – but that would require approval by Congress. John Hauserman, President of RetirementQuest Wealth Management shared, “It’s not a good long-term portfolio prescription for the majority of people, particularly those who are low- and middle-income, and need long-term growth.”
How many of you already offer a 401(k) plan and have maybe, just maybe, only see about 50% of your employees participating – even with a company match? Why in the world would anyone not participate? Well maybe they can’t afford to. In case you didn’t realize our economy has only just begun moving in the right direction. Many of us are still living paycheck to pay check. Still, everyone can always afford to save a little, and this plan allows individuals not necessarily inclined to do so, to do just that, save a little. While I always remain somewhat skeptical of anything the government gets involved in trying to manage, this program is good for America.
What we need to become is more evangelical to both Generation X & Y to start saving. It’s a tough pitch though given the college tuition-debt most are burdened with, and the lack of a quality career. Maybe, just maybe our President and Congress would realize that we need to get America back to work, and allow everyone the hope of achieving the American Dream. It is a bit long in the tooth to keep hearing that our current retirement tax subsidies disproportionately benefit only higher-income households. Our President needs to remember that this great country shouldn’t have nearly 50 million people forgotten and struggling in poverty – more than 16% of our population. Let’s get America back to work and then help them to save more for a well-deserved and dignified retirement.
Author’s Note: Please consult with your CFP®, CPA, Registered Investment Advisor, Investment Advisor Representative, and/or Estate/Tax/Eldercare Attorney when discussing your financial needs and developing the appropriate personal/business financial plan.
