Savings Plans for Low-Income Workers Ready by End of 2014

The Obama administration will begin enrolling low-income workers in its new retirement-savings plans by the end of the year, Treasury Secretary Jacob J. Lew said.

The savings plans, which will invest only in government securities, will require a minimum initial contribution of $25 as well as $5 per pay period, Lew told reporters on Air Force One today before President Barack Obama delivers a speech on retirement in Pittsburgh, Pennsylvania.

It’s “going to be a very simple, very safe retirement account,” Lew said.

The accounts, described by Obama yesterday in a State of the Union address that concentrated on expanding economic opportunity, are aimed at workers who don’t have access to a 401(k) plan and have difficulty saving for retirement.

Under the proposal, workers could have part of their pay deducted for deposit into an account invested in a group of U.S. government bonds with between four and 30 years maturity, the same investment available to federal workers.

The accounts, called MyRA, would be treated for tax purposes as a Roth individual retirement accounts, with future earnings tax-free and principal able to be withdrawn at any time.

The Treasury Department will be seeking a financial agent to manage the program, a senior administration official told reporters on a conference call today. The government, which will pay the fees and not charge account holders, is looking for a financial institution with experience handling a significant number of IRAs, the official said.

Annual Income

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 greater range of investment options. The plans would be portable so that Americans could keep them if they switch jobs.

Laurence D. Fink, chief executive officer of BlackRock Inc. (BLK), the world’s largest asset manager, said in a statement yesterday that he’s “tremendously encouraged” by a proposal he said he hoped would “kick off a much-needed national conversation” on retirement security.

Senior administration officials, who briefed reporters today on condition of anonymity, didn’t make any projections for the number of individuals or employers who would sign up. Participation would be voluntary for employees and employers, and the amount in the account will never fall below the principal.

Pilot Project

The officials described the 2014 start of the program as a pilot project.

Obama is promoting his State of the Union initiatives over the next two days with trips outside of Washington, including the retirement speech in Pittsburgh.

“This isn’t earth-shattering stuff,” said Brian Graff, chief executive officer of the American Society of Pension Professionals & Actuaries. “But it is a step in the right direction to get more people saving for retirement, which I would think is a bipartisan issue.”

“I don’t expect this to get a lot of pushback,” said Graff, who discussed the proposal in advance with Treasury officials. He said it draws on an existing program that permits workers to purchase U.S. savings bonds through payroll deductions and adds “a retirement twist.”

Automatic Option

The proposal resembles an earlier Obama administration plan that would have required employers to offer an automatic IRA option to employees. That plan, which was included in Obama’s 2014 budget and requires congressional approval, would have cost the government an estimated $17.6 billion in forgone revenue over 10 years.

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.

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.”

Second Largest

Wolohan declined to comment further before hearing the details of Obama’s proposal. Vanguard was the second-largest manager of 401(k)-type assets in 2012 behind Fidelity Investments, according to researcher Cerulli Associates.

Fidelity, 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.”

JPMorgan Chase & Co. (JPM), which manages retirement assets and administers plans, declined to comment before seeing more details, Gregory Roth, a bank spokesman, said in an e-mail.

One of the biggest challenges for the retirement system is that many workers don’t have access to a pension or 401(k) plan through their employer, said Lisa Mensah, executive director of the initiative on financial security at the Aspen Institute, a nonpartisan policy group in Washington.

“We have to get people in,” Mensah said. “You do need an automated way for people to get into the savings system.”

Small Businesses

Small-business groups in the past have opposed such proposals because they say that setting up the required payroll deduction would be a cost for them.

Molly Brogan Day, a spokeswoman for the National Small Business Association in Washington, said that while her group “supports making retirement savings easier, the auto-IRA idea is one we’ve raised skepticism over in the past because it put the administrative and financial onus squarely on small firms.”

U.S. savings bonds designed for retirement accounts have been proposed in the past and termed R-bonds, said Don Fuerst, an actuary and senior pension fellow at the American Academy of Actuaries.

The securities are seen as a way to allow low-income workers to save for retirement, Fuerst said. They usually can’t contribute much at the start, making their balances expensive to administer and vulnerable to investment-management costs.

“If you’re only putting a small amount into the plan the fees could eat up your investment income,” said Fuerst, who’s based in Washington. “This gets around that.”

Keeping Track

With savings bonds, he said, the U.S. government can issue the investments and cover the costs of keeping track of them.

The accounts aren’t as attractive as a typical employer-sponsored 401(k) because there is no employer match and only one investment option, Graff said.

Even so, it may significantly boost retirement savings for middle- and low-income workers who don’t have access to a 401(k) account, Graff said.

Middle- and moderate-income workers in particular are much more likely to set aside money for retirement when they can have it directly deducted from their pay, Graff said.

Among workers earning between $30,000 and $50,000 a year, 72 percent of those covered by an employer-sponsored payroll deduction retirement plan, such as a 401(k), choose to participate. Only 5 percent of those without such a plan set aside money through an IRA, according to a 2010 analysis of 2008 data by the Employee Benefit Research Institute.

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net; Margaret Talev in Washington at mtalev@bloomberg.net

To contact the editors responsible for this story: Steven Komarow at skomarow1@bloomberg.net; Jodi Schneider at jschneider50@bloomberg.net

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