On January 29, 2014, Mike Doming and Margaret Collins write in the Personal Finance section of Bloomberg:
President Barack Obama offered more Americans the chance to save for retirement through payroll deductions with a plan for new government-sponsored savings accounts.
The accounts, which Obama announced tonight in a State of the Union Address that concentrated on expanding economic opportunity, will be available to workers who don’t have access to a 401(k) plan, administration officials said.
The “MyRA” accounts, similar to an individual retirement account, will provide “a new way for working Americans to start their own retirement savings,” Obama said in the text of the speech released by the White House.
Under the initiative, workers would be allowed to have a portion of their pay deducted for deposit into an account invested in U.S. government bonds that would be treated for tax purposes as an individual retirement account, administration officials said.
The accounts, set up through the Treasury Department, would have a maximum balance after which money would have to be rolled over into an IRA, the officials said.
The officials project that millions of Americans will take advantage of the savings accounts.
“This isn’t earth-shattering stuff,” said Brian Graff, the chief executive officer of the American Society of Pension Professionals & Actuaries. “But it is a step in the right direction to get more people saving for retirement, which I would think is a bipartisan issue.”
Existing Authority
Obama can establish the savings program under existing executive authority without new legislation, the officials said. He will announce details of the plan tomorrow.
“I don’t expect this to get a lot of pushback,” said Graff, who discussed the proposal in advance with Treasury officials. He said it draws on an existing program that permits workers to purchase U.S. savings bonds through payroll deductions and adds “a retirement twist.”
The proposal resembles an earlier Obama administration plan that would have required employers to offer an automatic IRA option to employees. That plan, which was included in Obama’s 2014 budget, would have cost the government an estimated $17.6 billion in foregone revenue over 10 years.
About 68 percent of U.S. workers had access to retirement benefits as of March 2013, with 54 percent participating, according to the Bureau of Labor Statistics.
Company Reaction
“Although we don’t have the details yet, Vanguard is generally supportive of expanding savings opportunities for those not covered by a workplace retirement plan,” Linda Wolohan, a spokeswoman for Vanguard Group Inc., said in an e-mail.
Wolohan declined to comment further before hearing the specifics of Obama’s proposal. Vanguard was the second-largest manager of 401(k)-type assets in 2012 behind Fidelity Investments, according to researcher Cerulli Associates.
Fidelity, which is also the largest provider of IRAs, declined to comment before hearing the speech, according to an e-mail from spokeswoman Eileen O’Connor.
JPMorgan Chase & Co. (JPM), which manages retirement assets and administers plans, declined to comment before seeing more details, Gregory Roth, a spokesman for the bank, said in an e-mail.
Under the proposal, proceeds couldn’t be cashed out without a tax penalty until the depositor reaches retirement age, unlike ordinary savings-bond purchases, Graff said. The funds could be transferred to an ordinary IRA without penalty, he said.
Access Lacking
One of the biggest challenges for the U.S. retirement system is that many workers don’t have access to a pension or 401(k) plan through their employer, said Lisa Mensah, executive director of the initiative on financial security at the Aspen Institute.
“We have to get people in,” Mensah said. “You do need an automated way for people to get into the savings system.”
Small-business groups in the past have opposed such proposals because they say that setting up the required payroll deduction would be a cost for them.
U.S. savings bonds designed for retirement accounts have been proposed in the past and termed R-bonds, said Don Fuerst, an actuary and senior pension fellow at the American Academy of Actuaries.
The securities are seen as a way to allow low-income workers to save for retirement, Fuerst said. They usually can’t contribute much at the start, making their balances expensive to administer and vulnerable to investment-management costs.
‘Small Amount’
“If you’re only putting a small amount into the plan the fees could eat up your investment income,” said Fuerst, who is based in Washington. “This gets around that.”
With savings bonds the U.S. government could issue the investments and cover the costs of keeping track of them, he said.
The accounts aren’t as attractive as a typical employer-sponsored 401(k) because there is no employer match and only one investment option, Graff said.
Even so, he said, it may significantly boost retirement savings for middle- and low-income workers who don’t have access to a 401(k) account, Graff said.
Research has shown that middle- and moderate-income workers are likely to save for retirement when they can do so with a payroll deduction and are unlikely to do so when they don’t have that option, Graff said.
Among workers earning between $30,000 and $50,000 a year, 72 percent of those covered by an employer-sponsored payroll deduction retirement plan such as a 401(k) participate, while only 5 percent of those without such a plan set aside money through an individual retirement account, according to a 2010 analysis by the Employee Benefit Research Institute.
Participation in the Obama retirement savings program would be voluntary, Graff said.
