16 June 2019

MyRA Plans: New Retirement Savings Option for Some

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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.

Click here for the original article in the Wall Street Journal.

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