In the State of the Union address, President Obama briefly
mentioned a proposal for “myRA,” a new retirement savings vehicle. His comments
brought up numerous questions about how the myRA will be administered and how
it will function for America’s workers. "It's a new savings bond that
encourages folks to build a nest egg," Obama said.
Here are some of the key questions and answers compiled by Beth
Pinsker at Reuters:
Q: What is the plan, exactly?
A: Details are still emerging, but the basics are that these
accounts will allow Americans with incomes up to $191,000 to invest small
amounts per paycheck - as low as $5 - in a savings bond-like product. The rate
of return will be low, probably in the 1 percent range and akin to what workers
get from the Thrift Savings Plan, which is a retirement plan for federal
employees. The government will guarantee the rate won't fall below zero, so
investors will never lose money, and growth will be tax-free.
After an individual accumulates $15,000, the account would
roll over into a traditional individual retirement account.
Q: Is this better than a savings account?
A: The key benefit is that it will get people started on a
segregated retirement account, which will have tax-free growth. The rate is
also better than current saving account rates, which are typically under 1
percent.
Q: What impact will $15,000 have on retirement savings?
A: It won't provide much of an annuity or ongoing retirement
income. A savings account valued at $15,000 "is not going to help anyone
in terms of a secure retirement and maintaining a good standard of
living," said Joe Ready, director of institutional retirement and trust at
Wells Fargo.
Instead, it will be more of an emergency fund for workers
who otherwise are saving nothing, says Greg McBride, senior financial analyst
for Bankrate.com.
The program is geared to lower-income workers, especially
those who have no workplace retirement plans. About 21 percent of Americans
currently do not save for retirement, according to a study released this week
by TIAA-CREF.
Q: Will individuals have access to the money while it's in
the accounts?
A: You will likely be able to withdraw the money for any
reason, tax-free, which is what worries Ed Slott, founder of IRAhelp.com.
"To really work, you have to look at it as a long-term
savings account and not a slush fund," he said.
Q: What's the difference between myRa and another proposal,
called the "auto-IRA"?
A: Although not highlighted in the State of the Union
speech, there is another IRA proposal on the President's agenda, the
"auto-IRA." This is also geared to the 50 percent of Americans who
have no access to employer-sponsored retirement plans.
David Certner, legislative director for AARP, pointed out
that the auto-IRA would require congressional legislation because it involves
mandated actions by employers and employees, so it has not moved forward right
now. The myRA, in contrast, was something that the Obama administration could
do at the agency level because it is voluntary and works within existing
legislation.
"It's basically a Roth IRA that has one investment
option," Certner said.
Q: What kinds of companies could offer it?
A: Experts say the proposal is aimed at small businesses -
which are less likely to offer some kind of retirement savings option than
large companies.
When it comes to offering a retirement plan, a big barrier
for a small business is the time it takes to administer a plan. "Cost and
fiduciary oversight, plus the overall education for employees, are other key
factors," Ready said.
Q: What details are missing?
A: Key unanswered questions revolve around how employers
will structure the plans, how many of them will join the program and how
employees will be enticed to sign up.
"I think that employers that do not use automated
payrolls - and there are tens of millions of them - they probably will not want
to do it," said Salisbury.
Q: If implemented, will this get more Americans to save more
for retirement?
A. Probably not, said Alicia Munnell, director of the Center
for Retirement Research at Boston College. That's because people are unlikely
to take advantage of a retirement savings program unless they are forced to.
"This shines light in the right place; it has a very
clever design, but the bad thing is without auto enrollment, you're unlikely to
see much action," Munnell said.