The White House is betting that
convenience—and not necessarily rate of return—will nudge Americans who
currently aren't putting anything away for retirement into participating in a
new type of savings plan.
In his State of the Union
address in January, President Barack
Obama introduced a new, no-frills retirement account dubbed the
"myRA", which will function as a retirement-savings vehicle for
workers without access to an employer-sponsored plan such as a 401(k).
The president took executive
action to direct the U.S. Treasury Department to create the accounts, which
will be available beginning in late 2014, says Brandi Hoffine, a Treasury
spokeswoman.
Employers aren't required
to offer the accounts, and may have to jump through logistical hoops to set up
automatic payroll deductions. An as yet unnamed private-sector firm will handle
the funds' administration.
The myRA is designed to operate
like a Roth IRA: Contributions will be considered after-tax and grow tax-free.
Also like a Roth, myRAs will be open to individuals earning less than $129,000
and couples who earn less than $191,000, with an annual contribution limit of
$5,500 (or $6,500 for those 50 or older).
The accounts will offer a
single investment option—a savings bond that gives the same rate of return as
the G Fund, or the Government Securities Investment Fund in federal employees'
Thrift Savings Plan. (That fund's 2012 annual return was 1.47%; its average
annual return from 2003 through 2012 was 3.61%. Inflation, as measured by the
consumer-price index, was a year-over-year average of 2.5% for the 2003-to-2012
period.)
The accounts are designed
to minimize barriers to entry so that it's easy to start saving. They are
geared toward lower- and middle-income workers, Ms. Hoffine says. You can open
a myRA account with just $25 and make subsequent contributions via payroll
deductions as small as $5. There are no fees. For cautious investors, an
additional incentive is that the principal will be guaranteed. And investors
can keep the accounts when they change or leave jobs.
Each account's balance
will be capped at $15,000 (or a duration of 30 years, whichever comes first),
at which point an investor can roll it over into a private-sector retirement
account. But investors shouldn't take that as a suggestion that $15,000 is
enough to retire on. Rather, a maxed-out account represents a solid nest egg to
build upon, Ms. Hoffine says.
Some critics argue that
the accounts aren't a smart investment and that workers would be better served
by existing financial products, like Roth IRAs. Catherine Censullo, a wealth
manager at CMC Wealth Management in White Plains, N.Y., says that while myRA
investors won't lose their principal, they are likely to lose purchasing power
over time.
"The return on an
account like this is not going to keep pace with inflation," she says.
Yet the Treasury points out
that the G-Fund outpaced inflation over the past decade—and furthermore, that
myRAs might actually get workers in the habit of saving for retirement. Just
49% of all workers, and only 30% of part-time full-year workers, have access to
a retirement-savings plan through work, according to November 2013 data from
the Employee Benefit Research Institute. Part of the Treasury's goal is to
reach those workers who might not be saving at all, and offer a convenient way
to do so through work, Ms. Hoffine says.
Some have noted that the
accounts might be most effective if used as relatively short-term savings vehicles,
since—unlike traditional retirement accounts—there are no penalties for early
withdrawals. Treasury officials aren't promoting this idea. But the 1.47%
interest that the G-Fund paid in 2012 was significantly higher than the typical
savings-account rate for that year, which was 0.09% according to Bankrate.com.
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for the original article in the Wall Street Journal.