There weren't a lot of surprises in President Obama's State of the Union speech on Tuesday night. Some commentators were unprepared for Obama's fairly robust defense of the Affordable Care Act and the modesty of his "go it alone" executive orders. Most people found his tribute to Sgt. 1st Class Cory Remsburg, a badly wounded Army Ranger, unexpectedly moving. But I don't think anyone was expecting the myRA.
In the middle of the address, after a section about raising the minimum wage, Obama said he will "direct the Treasury to create a new way for working Americans to start their own retirement savings: MyRA," which he described as "a new savings bond that encourages folks to build a nest egg." He elaborated:
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.... MyRA guarantees a decent return with no risk of losing what you put in. And if this Congress wants to help, work with me to fix an upside-down tax code that gives big tax breaks to help the wealthy save, but does little or nothing for middle-class Americans, offer every American access to an automatic IRA on the job, so they can save at work just like everybody in this chamber can. [SOTU, via Federal News Service]
Not a lot of information. The White House gave a bit more of a look at the new savings vehicle in a fact sheet, calling it "a new simple, safe, and affordable 'starter' retirement savings account" that would "be offered through a familiar Roth IRA Account and, like savings bonds, would be backed by the U.S. government."
The White House promises to provide more details today. But Damian Paletta and Anne Tergesen at The Wall Street Journal note that myRA appears "similar to an idea Treasury officials have studied for several years, which would create something called an R-bond, allowing employees to have a certain amount of money deducted from each paycheck and directed toward a specific investment."
The retirement plans will be voluntary for the employees of participating companies, and sort of structured like Roth IRAs: Workers pay taxes on the wages diverted into the myRA, but not when they draw the fund down at retirement age. The money can be rolled over into an ordinary Roth IRA without penalty, though — and will have to be after the account reaches a certain balance, reports Bloomberg News, citing government officials.
In other words, it really is just a "starter" retirement account. But that doesn't mean it can't be a big deal.
The idea that Americans aren't setting enough aside for retirement isn't controversial. Here are some quick numbers:
- 53 percent of working-age households are not on track to retire at their pre-retirement standard of living, according to Boston College's Center for Retirement Research.
- 59 percent of new middle-class retirees will outlive their savings, according to Ernst & Young projections.
- 68 percent of U.S. workers have access to retirement benefits, and 54 percent participate, according to a March 2013 Bureau of Labor Statistics analysis.
The myRA aims to improve that last statistic by encouraging businesses to offer their workers at least this one avenue for retirement savings, and opening the door to lower-income workers. Because the the accounts will be administered by the Treasury Department, modest investments won't be devoured by fund-maintenance fees. The White House hasn't said what kind of return it expects on the new accounts, but any guarantee of growing balances will also attract more risk-averse workers spooked by the recent stock market crashes.
The downside of a myRA, compared with many 401(k) plans, is that there will be no employer match and really only one investment option.
There are undoubtedly better solutions out there — Obama has been proposing automatic (opt-out) enrollment in IRAs for workers without employer retirement plans "in every budget since he took office," the White House notes, and Congress has been kicking around ideas for years. (Research shows employees are much more likely to save for retirement when the money is taken out of their paycheck.)
With his new plan, Obama mostly "admitted what U.S. employees have long known: Retirement security stinks in this country and 401(k)s are not the answer," says John Wasik at Forbes. "Retirement accounts should be universally available — you shouldn't have to depend upon an employer to offer them." He makes a good point:
The problem isn't that Americans don't have enough ways to save for retirement — they have too many. Look at the alphabet soup of plans from 401(k)s, 403(b)s, 457s to Roth IRAs. Why not consolidate them and make the tax breaks uniform through credits? Make a universal plan with low fees accessible to everyone — regardless of where they work. [Forbes]
But any significant changes to America's retirement infrastructure requires action by Congress. Obama is about as optimistic that will happen as you are. The myRA's main advantage is that the president already has the authority to implement it by executive action, through a program that allows workers to purchase U.S. savings bonds tax-free, Brian Graff at the American Society of Pension Professionals & Actuaries tells Bloomberg.
"This isn't earth-shattering stuff," Graff says. "But it is a step in the right direction to get more people saving for retirement, which I would think is a bipartisan issue."
It may well be. But the devil, as they say, is in the details. Stay tuned.