How Will Obama's New myRA Retirement Plan Work? (Demo)

In his State of the Union address, Obama said he’ll issue an executive order for a new retirement plan.   (Chip Somodevilla/Getty Images)

On January 29, 2014, Peter Weber writes on The Week:

There weren’t a lot of surprises in President Obama’s State of the Union speech on Tuesday night…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 IRAs: Workers won’t pay taxes on the wages diverted into the myRA, but they would pay penalties for cashing out before retirement age. The money can be rolled over into an ordinary 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.