MyRA—New and Improved Retirement Plan, or Not?
In his State of the Union address, President Obama announced that he would direct the Department of the Treasury to create “myRA” — a “starter” retirement savings account for low- to middle-income Americans.
Employers who choose to participate in a pilot program will be able to offer their employees the myRA by the end of 2014. Should they?
The program makes it easy for employees to save a small nest egg. Features that help them do so include:
- Available to households earning up to $191,000 per year; $129,000 for individuals.
- No or very low cost for employers: employers will not administer or contribute to accounts.
- Payroll-based contributions, as low as $5 per month or week; up to $5,500 per year.
- Low initial investment: participants can open an account with as little as $25.
- Portable: Employees can keep their account when they change jobs.
- Account holders can roll their funds into a private-sector retirement account at any time; they must do so when their balance reaches $15,000. Workers will be able to withdraw contributions at any time without penalty. However, withdrawal of interest earned before age 59½ will result in taxes and possible penalties, as in a Roth IRA.
When this newsletter went to press, the nonpartisan Employee Benefit Research Institute (EBRI) had not examined the myRA proposal thoroughly. However, EBRI noted that past surveys have indicated employers would support payroll deduction for retirement savings if employer responsibility were limited to sending employee contributions to a designated account. In addition, workers in past Retirement Confidence Surveys have said they could save small amounts. The payroll deduction feature of the myRA would make saving easier.
Critics note that the plans would be structured like a Roth IRA but with a much lower annual contribution cap of $5,000. And while President Obama used the fact that the myRA funds would be invested in government bonds to tout the program’s safety, government bonds typically have much lower yields than other investments. At the typical government bond rate of about 2 to 3 percent, funds invested over the long term would likely not keep up with inflation.
The gold standard defined contribution retirement plan remains the traditional 401(k). Employers who are daunted by the possibility of paperwork and nondiscrimination tests have other options. Please call us to discuss employee retirement plans.