In his State of the Union address, President Obama announced his intention to utilize the power of the phone and the pen to create a new class of government-sponsored retirement account for workers without access to a 401(k). Dubbed the MyRA account, the new vehicle is intended to help employees channel savings through payroll deduction into a special Roth IRA account. It would be voluntary for both employers and participants and does not provide for any matching contributions.
The plan as proposed probably exceeds the President's authority to promulgate unilaterally, since the cost of administration would likely require congressional appropriation. Nevertheless, the concept contains a kernel that could conceivably engender support from both political parties, each of whom readily acknowledge the impending retirement savings crisis.
As currently envisioned, the MyRA plan would allow workers to set aside as little at $5 per paycheck until the account value reaches $15,000. At that point the MyRA account balance would be transferred into a regular Roth IRA. So far as it goes, so good. But a few changes would make the proposal truly promising.
One significant weakness of the plan is the underlying investment. All contributions must purchase shares in a low-yielding government bond fund (the Government Securities Investment Fund, one of several selections available to U.S. government employees through their Thrift Savings Plan). Ten year historical returns of the fund have barely kept pace with inflation.
A more interesting alternative would be to include all of the various TSP funds currently available to federal workers. This would afford participants access to a similar array of U.S. and international stock and bond fund investments available to traditional 401(k) investors (along with commensurate potential long-term returns). This expansion, along with a higher cap on the total account value (ideally limitless), would go far toward providing a workable alternative to those without an employer plan.
Another obvious weakness is the voluntary nature of the plan from the employer's perspective. Those of us who reflexively recoil at the prospect of more government mandates on small businesses should recognize that the alternative is undoubtedly higher taxes in the out years to support the under-saved. Furthermore, the administrative burden on the employer need not be onerous. By piggy-backing onto the existing Social Security system, collection and remission of payroll deduction contributions could be seamlessly integrated into the payroll process at very little cost to the employer. The Social Security Administration would be responsible for redirecting the MyRA contribution into the worker's account.
Integrating the new program with the FICA system could also set the stage for another potentially constructive experiment: allowing workers to divert a limited portion of their regular Social Security tax withholding into more attractive investment options like the TSP stock and bond funds. This idea remains politically radioactive, but must be entertained in any honest discussion of the solvency of the system and the alarmingly low effective return on investment in Social Security contributions under present conditions.
The next generation of retirees will include a significant cohort that has not been willing or able to set aside enough resources. According to the Employee Benefits Research Institute, just 59 percent of workers even have access to an employer plan, and only 70 percent of those people actually participate. Nearly half of all Americans have no retirement savings at all. Bold action is required to mitigate the impending crisis and its devastating impact on future taxpayers. The President's proposed MyRA concept, with a few significant improvements, could find support from both parties and measurably improve the retirement prospects for millions of Americans.
Christopher A. Hopkins, CFA, is a vice president for Barnett and Co. in Chattanooga. To submit personal finance questions, write to email@example.com.