President Barack Obama’s proposal for encouraging low-income Americans to set money aside in accounts with tax advantages is a limited step that may help bolster retirement savings.
The proposal, detailed today by the administration, would let Americans with as little as $25 open individual retirement accounts that invest in government bonds. The principal, funded with post-tax contributions, would be protected and could be withdrawn without penalty at any time.
Such accounts would lack the broader investment options and employer match of workers’ 401(k) retirement accounts.
Obama’s proposal is a narrower version of the automatic IRA proposal he has included in his budget and that Congress hasn’t advanced. That plan would have cost the government an estimated $17.6 billion in forgone revenue over 10 years.
“I don’t think anyone thinks this is going to magically turn us into a nation of savers,” said William Gale, director of the Retirement Security Project at the Brookings Institution. “But for a particular group it seems like it could be part of the solution.”
About 68 percent of U.S. workers had access to pensions or retirement savings plans as of March 2013, with 54 percent participating, according to the Bureau of Labor Statistics.
Senior administration officials briefing reporters offered no estimate of how many people would enroll in the new plans. They said they hoped the program would be particularly attractive to women, part-time workers and members of minority groups without access to retirement accounts at work.
“For those of you who don’t have a 401(k) on the job, don’t have a pension on the job, don’t have a mechanism to start saving, especially young workers, you can get started now,” Obama said today at United States Steel Corp. (X) near Pittsburgh.
For both employees and employers, the so-called MyRA accounts would differ from more familiar 401(k) plans.
Workers would have only one investment option -- the basket of government bonds available to federal workers in their retirement plans. The bonds have maturities between four and 30 years. Most 401(k) plans offer a variety of investment options.
Employees wouldn’t receive a match, though the contributions would qualify them for the saver’s credit under existing tax law. That credit is paid through tax refunds, not as a contribution into the account.
Also, employers would have to agree to allow payroll deductions. Unlike with 401(k) plans, they wouldn’t have to contract with a financial services company, follow nondiscrimination rules or have a fiduciary responsibility.
Treasury Secretary Jacob J. Lew said the program would begin operating by the end of the year. The government will begin looking for a financial agent with experience in administering IRAs.
The accounts would be open to people with annual household income up to $191,000 whose employers choose to participate, according to a White House fact sheet.
The plans would have a maximum balance of $15,000, after which money would have to be rolled over into a private-sector Roth IRA with a range of investment options. The plans would be portable so workers could keep them if they switch jobs.
“People will say, hey, I don’t want to invest in government bonds,” Gale said. “I want to take this nest egg and move it somewhere.”
The Investment Company Institute, a Washington-based trade group for the mutual-fund industry, welcomed the proposal as a complement to “existing vibrant and competitive private-sector retirement offerings,” according to a statement.
Linda Wolohan, a spokeswoman for Vanguard Group Inc., said in an e-mail yesterday that “although we don’t have the details yet, Vanguard is generally supportive of expanding savings opportunities for those not covered by a workplace retirement plan.”
Fidelity Investments, also the largest provider of IRAs, “supports efforts to put more Americans on a path toward retirement readiness,” spokeswoman Eileen O’Connor said in an e-mail. “We look forward to reviewing the details of the president’s program.”
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