Targeting Americans who don't have plans through their employers, President Obama is hoping the launch of a new plan will get them started on saving for retirement.
The myRA will be offered via a Roth individual retirement account where savers will benefit from principal protection, so the account balance will never go down in value, according to a brief on the White House's website.
The security in the account, like all savings bonds, will be backed by the U.S. government and contributions can be withdrawn tax free at any time.
Initial investments could be as low as $25 and contributions that are as low as $5 could be made through payroll deductions. Savers have the option of keeping the same account when they change jobs and can roll the balance into a private-sector retirement account at any time.
Participants could save up to $15,000, or for a maximum of 30 years, in their accounts before transferring their balance to a private-sector Roth IRA.
Savers will earn interest at the same variable interest rate as the federal employees’ Thrift Savings Plan Government Securities Investment Fund, according to the White House.
The myRA would be available to households earning up to $191,000 a year.
The accounts will be offered through an initial pilot program to employees of employers who choose to participate by the end of 2014.Workers would not be required to contribute and are free to opt out, the White House said. Employers are also not required to contribute. The plan would help defray the minimal administrative costs of establishing auto-IRAs for small businesses,including through tax incentives.
During his recent State of the Union address, Obama introduced the myRA. He said he will use his executive authority to direct the Department of the Treasury to create the account.
About half of all workers and 75% of part-time workers lack access to employer-sponsored retirement plans, according to the White House.
For credit unions and others, the myRA has its pluses and minuses, said Jeff Gorton, a CPA, Certified Financial Planner and investment adviser representative with AlphaStar Capital Management in Cornelius, N.C.
“Americans are typically terrible at saving, so if the myRA can encourage savings I am all for it,” Gorton told Credit Union Times. “For people that are nervous about put their hard-earned dollars in volatile investments, this is a very low-risk method of investing. But the returns are unlikely to keep pace with inflation.”
For investors with a longer time horizon, Gorton said history has shown that portfolios having stock market exposure will keep pace with inflation better, and outperform the other asset classes.
Gorton said he would like to see the myRA account expanded to include all five funds that the Thrift Savings Plan currently provides. This would equip savers with more options at a low expense ratio for each fund, he pointed out.
While encouraging people to save and invest is laudable, the president's MyRA essentially duplicates the Roth-style plans already available, said Jason Fichtner a senior research fellow at the Mercatus Center at George Mason University in Fairfax, Va.
“The president's efforts would be far better spent reforming Social Security to ensure all workers can enjoy a secure and dignified retirement,” Fichtner suggested.
Obama's new retirement account proposal comes at a time when consumers are saving more, said Dan Geller, executive vice president of Market Rates Insight, a San Anselmo, Calif., research firm.
“When economic conditions are tough, consumers act in a similar instinctive manner by increasing their savings as a measure of self-preservation,” Geller explained.
As proof, he pointed to the recession period from December 2007 to December 2009 when consumers increased their pace of bank savings by $100 billion compared to the previous two years.