Michelle Hicks, The Daily Record Newswire
During President Barack Obama’s State of the Union address Jan. 28, he announced a new type of “starter” retirement savings account, myRA.
This will be a new savings opportunity of up to $15,000 for Americans whose employer doesn’t offer a retirement savings account like a 401(k). But, unlike an employer-sponsored 401(k), myRA will not be operated by the employer. Instead, the federal government will run the account and the employer will simply offer the benefit.
Obama said he was directing the Treasury Department to create this new savings avenue because most of today’s workers no longer have a pension, and Social Security isn’t enough on its own. The real story of how unready Americans are for retirement is pretty stark. According to the Employer Benefit Research Institute, 46 percent of Americans say they have less than $10,000 saved for retirement, with 29 percent of working Americans having saved less than $1,000. In fact, the EBRI says only 46 percent of Americans have even tried to calculate how much they’ll need when they retire.
So, myRA is the president’s solution to get Americans saving. The White House released a press release with more details the day after the State of the Union. If you watched the address, you may have noticed Obama had a hard time saying the name of this plan, but it appears it will be easier to participate in than pronounce. Here’s a quick overview of how it works.
The account works much like a Roth IRA. This means monies are contributed after taxes are deducted from pay (unlike traditional 401(k)s that allow pre-tax contributions). But unlike traditional Roths, contributions can be withdrawn tax-free at any time. The convenience of this may make it more attractive for individuals to save since they can access their money easily if needed.
However, the reason it is often difficult to remove funds from traditional retirement saving accounts is to help ensure the money stays put. Participants may be tempted to use the account like a piggy bank, putting money in and then taking it out before retirement. It will be interesting to see over time if the balances grow, or if the temptation to use the easily accessible funds keeps the balances low.
Another feature of the account is that principal investments are protected like a savings bond: backed by the federal government. This means participants won’t lose their initial investment, and balances will never go down (unless account holders make a withdrawal). Balances can build interest. Savers will earn the same variable interest rate as the federal employees’ Thrift Saving Plan.
Employers can sign up for an initial pilot program through the end of the year. The Treasury Department website says the funds should be ready in late 2014, so watch treasurydirect.gov if you’re interested. Once employers are signed up, workers can enroll if they make less than $191,000 year. With as little as $25, they can open an account, and subsequent investments can be as low as $5 – preferably made through payroll deduction. And, if employees leave their current employers, they can take their accounts with them.
Remember, this is just a “starter” account. Once the balance reaches $15,000, myRA must be rolled over into a private-sector Roth IRA. Or, if the balance is less than $15,000, it will have to be rolled over after 30 years.
But the hope is that the balances grow. Many critics are already asking if it is enough. With such dismal American savings rates, it’s obviously not enough. But it is one more nudge to help Americans without other employer options get started down a path to save and build financial security for their golden years.
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Michelle Hicks, a senior professional in human resources, is a director in the communication practice of Buck Consultants, a Xerox company.
