President Obama introduced a new retirement savings vehicle that he called a “MyRA” in his State of the Union address on Tuesday evening, and the White House has followed up with more details on Wednesday about it.
“Let's do more to help Americans save for retirement,” said Obama (see Obama Calls for Wage Increases and Tax Reforms in State of the Union). “Today, most workers don't have a pension. A Social Security check often isn't enough on its own. And while the stock market has doubled over the last five years, that doesn't help folks who don't have 401(k)s. That’s why, tomorrow, I will direct the Treasury to create a new way for working Americans to start their own retirement savings: MyRA. It's a new savings bond that encourages folks to build a nest egg. MyRA guarantees a decent return with no risk of losing what you put in."
The White House press secretary's office said in a fact sheet it released Wednesday that MyRA would provide a new simple, safe and affordable “starter” retirement savings account that will be offered through employers to help Americans begin to save for retirement.
The new product will be targeted to the many Americans who currently lack access to workplace retirement savings plans, which is usually the most effective way to save for retirement, the White House noted. It wsa created by executive action Wednesday, bypassing Congress.
Unlike a 401(k), however, MyRA will offer “principal protection” so a saver’s account balance “will never go down,” the White House said. “The product will be offered via a familiar Roth IRA account, and savers will benefit from principal protection, so the account balance will never go down in value. The security in the account, like all savings bonds, will be backed by the U.S. government. Contributions can be withdrawn tax free at any time.”
To make MyRA a more user-friendly, “portable” account, contributions will be voluntary, automatic and small. Initial investments could be as low as $25 and contributions that are as low as $5 could be made through automatic payroll deductions. “Savers have the option of keeping the same account when they change jobs and can roll the balance into a private-sector retirement account at any time,” said the White House.
In addition, MyRA is expected to provide the same secure investment return currently available to federal employees. Savers will earn interest at the same variable interest rate as the federal employees’ Thrift Savings Plan Government Securities Investment Fund.
MyRA is expected to be widely available to millions of lower- and middle-income Americans through their employers. It will be available to households earning up to $191,000 a year. The accounts will be offered through an initial pilot program to employees of employers who choose to participate by the end of 2014. “The accounts are little to no cost and easy for employers to use, since employers will neither administer the accounts nor contribute to them,” said the White House. “Participants could save up to $15,000, or for a maximum of 30 years, in their accounts before transferring their balance to a private sector Roth IRA.”
New York CPA Reactions
A group of New York State Society of CPAs members offered various reactions to the President’s MyRA proposal.
“The concept sounds great and it has the potential to build a foundation for people to begin saving for their retirement,” said David Young, CPA, a member of the NYSSCPA’s Rochester Chapter. “The challenge could be in the implementation for the employers and employees. The cost of the implementation and administration may outweigh the benefit gained from the My RA’ program.”
Another NYSSCPA member, Catherine Censullo, a CPA and personal financial specialist from White Plains, N.Y., said she was concerned about the rate of return. “The bonds will have very small returns, which are not good for keeping up with inflation over the long term growth, but participants will not have to worry about losing their money invested,” she said.
“My other concern is that it will be too easy to take the money back out, which may defeat the purpose of putting money away and not touching it before retirement,” Censullo added. ”What remains to be seen is how the plans will be structured and what the incentive will be for employers to participate in the plan.”
Another certified financial advisor shared his concerns. “President Obama's "MyRA" is another simple-minded response to a serious problem afflicting our nation's citizenry,” said Daniel G. Mazzola, a certified financial analyst and CPA from Long Island, N.Y. “Is it appropriate to encourage people to invest in long-term Treasury bonds in a climate of historically low interest rates? Will the money deducted be placed in a separate account for each individual or a general trust fund like the Social Security Trust Fund with which the government has access and can use for general expenditures?”
“Is the President unaware that it is relatively easy for a private sector worker to establish an IRA at a local bank or brokerage house?" Mazzola added. “Making it easier for people to set aside money for retirement is a small measure when compared to providing an overall environment in which they have an opportunity to be successful.”
Despite President Obama’s recent emphasis on issuing executive orders as a way to get around a gridlocked Congress, the White House said the administration would continue to work with Congress on the President’s existing proposals to make sure that all Americans can secure a dignified retirement. “While Social Security is and must remain a rock-solid, guaranteed progressive benefit that every American can rely on, the most secure retirement requires a three-legged stool that includes savings and pensions,” said the fact sheet. “That’s why the President is using his executive authority to create the myRA’ and has already proposed to work with Congress on the following proposals to help Americans save for their retirement.”
Those proposals, which depend on passage in Congress, include giving every employee access to easy, payroll-based savings through the “Auto-IRA.” Approximately half of all American workers do not have access to employer-sponsored retirement plans like 401(k)s, which puts the onus on individuals to set up and invest in an Individual Retirement Account, the White House noted. Up to 9 out of 10 workers automatically enrolled in a 401(k) plan through their employer make contributions, even years later, while fewer than 1 out of 10 workers eligible to contribute to an IRA voluntarily do so. The President’s budget will propose to establish automatic enrollment in IRAs (or “auto-IRAs”) for employees without access to a workplace savings plan, in keeping with a plan that he has proposed in every budget since he took office. Employers that do not provide any employer-sponsored savings plan would be required to connect their employees with a payroll deduction IRA. This proposal could provide access to one-quarter of all workers, according to a recent study.
Workers would not be required to contribute to an Auto-IRA and are free to opt out. Employers would also not contribute. The plan would also help defray the minimal administrative costs of establishing auto-IRAs for small businesses, including through tax incentives, the White House pointed out.
The Auto-IRA would spread the tax benefits for retirement savings to millions more middle-class Americans. “Current retirement tax subsidies disproportionately benefit higher-income households, many of whom would have saved with or without incentives,” said the White House. “An estimated two-thirds of tax benefits for retirement saving go to the top 20 percent of earners, with one-third going to the top 5 percent of earners. Our tax incentives for retirement can be designed more efficiently. According to one 2012 study, additional tax expenditures are a comparatively inefficient way to generate additional saving. The President has proposed to limit the benefits of tax breaks, including retirement tax preferences, for high-income households to a maximum of 28 percent. The President has also proposed to limit contributions to tax-preferred savings accounts once balances are about $3.2 million, large enough to fund a reasonable pension in retirement.”