In his 2014 State of the Union address, President Barack Obama announced he would instruct the U.S. Treasury to create a new kind of salary-deferral retirement savings vehicle, the "MyRA," to give workers whose employers don't offer 401(k) plans a way to save for retirement.
"Today, most workers don’t have a pension. A Social Security check often isn’t enough on its own,” the president noted. “And while the stock market has doubled over the last five years, that doesn’t help folks who don’t have 401(k)s." MyRAs will address this problem by providing “a new way for working Americans to start their own retirement savings,” Obama said.
According to a Treasury Department fact sheet and related Frequently Asked Questions, the federal government will guarantee the return of principal that employees contribute to their MyRAs. The accounts also will:
- Have the same tax treatment as Roth individual retirement accounts (IRAs). Employees would pay taxes on their contributions before the money was deposited into their MyRA, but distributions during retirement would be tax-free.
- Be open to workers with annual incomes up to $129,000 (individuals) or $191,000 (couples), whose employers choose to participate. Initial investments may be as low as $25, and payroll contributions as low as $5.
- Be set up through the Treasury Department. Companies will not have to manage the accounts but will offer them to employees and will assist with salary deferrals through their payroll systems. Employees may opt to have some of their pay deposited in the accounts and then invested in U.S. government bonds.
- Have the same variable interest rate return as the Government Securities Investment Fund available to federal workers, in which payment of principal and interest is guaranteed by the federal government.
- Be portable and may be rolled into a Roth IRA at any time. Once a MyRA grows to $15,000, it must be rolled over into a Roth IRA.
The White House plans to create the accounts through executive action, bypassing the need for congressional approval.
"A voluntary savings tool of this type can complement the existing vibrant and competitive private-sector retirement offerings," said the Investment Companies Institute (ICI), a trade association, in a statement.
“The idea is not really such a new idea," Paul Hamburger, a partner at Proskauer Rose LLP in Washington, D.C., told SHRM Online. "The government issued individual retirement bonds years ago and stopped issuing them in 1982. They were a good investment and had a good yield."
However, CNBC reported an average annual return for the past three years of 2.24 percent in the Government Securities Investment Fund of just 2.24 percent as of December 2013, "while the average annual inflation rate for consumer prices over the past three years was 2.07 percent."
In contrast, 401(k) and similar defined contribution plans allow participants to invest in either bond or stock funds, as well as balanced stock/bond funds and target-date funds. Stock-based funds have the potential for much higher long-term growth than bonds, although they are also vulnerable to steep price declines that can last several years.
Moreover, HR consultancy Mercer released a response to the president's address that held: "The U.S. already has a number of successful retirement programs in existence. The addition of yet another program could add confusion for both employers and employees. The success we have seen in other countries suggests there is real merit in the simplicity and universality of their programs. We suggest that expanding and improving current programs may be more effective across the entire spectrum of workers than creating additional retirement programs."
Automatic IRAs, Too?
President Obama also indicated he plans to re-propose, in his fiscal-year 2015 budget plan, the use of automatic payroll deduction IRAs. Previous versions of this proposal would require every employer—except very small or new ones—to offer an “automatic IRA” if it does not sponsor a qualified retirement plan or excludes significant groups of employees from coverage.
In the event such a measure were to be enacted as part of the 2015 budget legislation, some employers that don't offer 401(k)s or similar qualified plans might be required to offer employees automatic IRAs—and also would be eligible to provide employees with access to MyRAs.
Savings Incentives Challenged
The president also called on Congress to "work with me to fix an upside-down tax code that gives big tax breaks to help the wealthy save but does little to nothing for middle-class Americans." Some interpreted these comments as indicating that an attempt to limit tax-deductible contributions to defined contribution plans is again on the president's agenda.
“While we welcome the president’s effort to create new retirement savings opportunities, it is with regret and deep concern that we heard his comments about reducing the retirement tax incentives that have been part of the foundation for the success of the private-sector retirement system for all Americans, including hardworking middle-income Americans," the ICI statement noted.
“The president said the tax incentives for 401(k) plans primarily benefit those with higher incomes,” said Brian Graff, CEO of the American Society of Pension Professionals & Actuaries (ASPPA), in a statement. "In fact, 80 percent of 401(k) plan participants are middle-class Americans making less than $100,000. The president said the tax incentives for retirement savings are ‘upside down’—meaning they mostly go to the wealthy. In reality, households making more than $200,000 only get 17 percent of the tax benefits from 401(k) plans, while middle-income households enjoy the majority of such tax benefits.”
Added Andrew Remo, ASPPA’s congressional affairs manager: "President Obama’s upcoming budget is slated to be released in March. Last year’s budget included his proposal to cap overall retirement savings, which would punish successful savers who played by the rules and will certainly lead to the termination of small-business retirement plans once business owners reach the cap. Unfortunately, it looks like this year’s budget proposal will bring more of the same."
Stephen Miller, CEBS, is an online editor/manager for SHRM.
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