The United States needs a sleek new vehicle for workplace retirement saving, something that covers the millions of workers who do not have a 401(k) or traditional pension. But on Wednesday, the White House rolled out a kid’s bike with training wheels instead, otherwise known as the myRA.
The U.S Treasury has been beta-testing the plan for the past year and just now is rolling it out nationally to address the serious problem of so many workers not having retirement plans.
In 2013, just 40 percent of U.S. households owned any type of retirement account – IRA, 401(k) or traditional pension – down from 48 percent in 2007, according to the Federal Reserve Board’s triennial Survey of Consumer Finances released in September 2014.
The myRA is a nice start, but only if it leads to something bigger – much bigger, in fact.
One problem is that the accounts are not designed to generate meaningful retirement savings on their own because they cannot hold balances higher than $15,000. At that point – or earlier – accounts must be rolled over to a private Roth account.
As a starter account, the myRA functions as a federally sponsored Roth IRA. The accounts are open to workers with annual income up to $131,000 (single tax filers) or $193,000 (filing jointly). They are subject to the usual annual IRA contribution limits: $5,500 for individuals, or $6,500 for savers age 50 or higher.
Some employers will offer their workers access, and take contributions through payroll deductions. Individuals can also sign up on their own through myRA.gov (myra.gov) or by calling 855-406-6972. Accounts can be funded from a paycheck, bank account or a federal tax refund.
Like any Roth, the contributions come from post-tax money and contributed funds can be withdrawn without tax or penalty. The earnings can be withdrawn penalty-free in certain situations before age 59-1/2.
But unlike most IRAs, there are no fees or minimum contribution levels, and the principal is guaranteed by the Treasury – you cannot lose money.
HELPING PROBLEM SAVERS
Here is another difference between the myRA and garden variety Roth and traditional IRAs: There is only one investment option. MyRA accounts earn interest at the same variable rate paid on the Government Securities Fund offered to federal employees in the Thrift Savings Plan. That fund returned 2.31 percent in 2014 and has had an average annual return of 3.19 percent over the 10-year period ending December 2014. That is barely enough to keep even with inflation.
So where is the powerful vehicle we need – or at least a racing bike?
One solution that could work is a national auto-IRA, which the Obama administration has been asking Congress to approve since 2010 – an idea that has faced opposition from Republicans because of its mandatory participation feature.
A similar program created in the United Kingdom in 2008 has already signed up 34,000 employers and 2.5 million workers, and it features mandatory employer matching contributions, with accounts invested in target-date funds. Some U.S. states are also trying their own solutions, particularly California and Illinois.
“MyRA is a tool – state initiatives are a solution,” says David John, senior strategic policy advisor at AARP.
John thinks myRA will work with the audience it is targeting – people who have not been in the habit of saving – especially because of the guarantee that you cannot lose money. “Saving is like exercise. It’s a habit you get into and build. So long as you have a positive experience, you get acclimated and keep going.”