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Tuesday, February 4, 2014

Americans are notoriously poor savers.  Research shows that unless a savings program like a 401(k) plan is offered at the workplace, Americans do not save regularly.  As the retirement savings model has moved away from a guaranteed income model found in defined benefit plans to the requisite self-sufficiency of savings through a defined contribution arrangement, pressure has been placed on the retirement system to make certain that American workers have sufficient assets for a dignified retirement.

In an effort to change the non-saving culture, the Treasury Department, as ordered by the President without the need for Congressional approval, is developing the myRA (my Retirement Account) to give people the opportunity to save in what should be a simple and straightforward manner.  The myRA (and note, Treasury says it is not pronounced “Myra”) is intended to supplement Social Security and other possible savings.  It is not expected to be the primary source of retirement income for Americans.  In many respects, it looks like a payroll reduction Roth account for small savings amounts.

Here are some of the features of myRA as announced by the Treasury Department:

  • Looks and feels like a Roth IRA with the same tax treatment (after-tax contributions, tax-free growth) with annual income eligibility limits beginning at $129,000 for an individual and $191,000 for a couple, both of which will be subject to COLA adjustments.
  • It is a no-load arrangement, i.e., there will be no fees for the investments (although a White House fact sheet hints that there could be some other costs).
  • A myRA can be opened with as little as $25, and direct salary reduction of at least $5 can be funded into the myRA.
  • The account balance will never go down in value.
  • Security for a myRA will be the full faith and credit of the United States – in other words, myRAs will be invested in U.S. savings bonds and other Treasury instruments while earning interest at the variable rate that is the Government Securities Investment Fund rate in the Thrift Savings Plan for Federal employees, i.e., a very low rate of return.
  • There will be no employer contributions.
  • There will be no requirement for employers to participate – but Treasury believes that participation by employers will help them attract and retain employees at little or no cost (just the cost of processing and transmitting the contributions) and that doing so will be an easy way for them to assist employees in improving their financial situations through saving.
  • Once an employer agrees to participate, employees will sign up online.  Details will need to be provided in order to coordinate the employee enrollment with the employer payroll system.
  • myRA is fully portable.
  • myRA contributions can be withdrawn at any time on a tax-free basis .
  • Earnings in a myRA will be tax-free unless withdrawn before the saver is 59½.
  • Savers can build their account for 30 years or until the myRA reaches $15,000.  Once the first of these is reached, the myRA will rollover to a private-sector Roth IRA.  Treasury will promulgate rollover rules.
  • myRAs are not intended to replace other savings arrangement like 401(k) plans and 403(b) plans.  myRAs are intended to benefit those employees who do not have access to an employer sponsored plan.
  • Treasury expects myRAs to be available in late 2014.
  • For more information, check out the Treasury’s new website.

Whether it will actually change the savings culture is certainly open for debate and much will depend on the details.  However, the voluntary nature of myRAs may undermine their usefulness in increasing savings, as research shows (and the President’s fact sheet agrees) that automatic enrollment has a more significant effect on encouraging participation than merely sponsoring a plan.  Additionally, payroll-deduction IRAs already exist (although not necessarily backed by government securities), so myRA is more of a twist on an existing idea than a whole new vehicle.  All of that said, most retirement professionals will not have a problem adding another tool to the toolbox of saving for retirement and another line on the long list of abbreviations in the retirement space.

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