In the midst of what many economists call a “retirement crisis,” President Barack Obama took the occasion of his State of the Union address to propose a new retirement savings program involving employer payroll deductions and government-sponsored savings accounts.
The program would be known as MyRA (My Retirement Account), and it would enable workers who don’t have access to a 401(k) plan to set aside their own retirement dollars at work. It would be up to employers to manage such a program for their employees, and to the Treasury Department at the national level.
“While the stock market has doubled over the last five years, that doesn’t help folks who don’t have 401(k)s,” Obama said. “MyRA guarantees a decent return with no risk of losing what you have put in.”
Reaction in the media to “MyRA” was mixed following the President’s address.
Brian Graff, CEO of the American Society of Pension Professionals & Actuaries, was quoted in Bloomberg as saying, “This isn’t earth-shattering stuff. But it is a step in the right direction to get more people saving for retirement, which I would think is a bipartisan issue.”
But at Entrepreneur, columnist Catherine Clifford wrote that, “while this could spell significant new administrative work on the part of small-business owners, keep in mind that many a plan has been unveiled to much pomp and circumstance during many a State of the Union addresses and then have amounted to nothing. After all, this is politics.”
So how do professional retirement planners weigh-in on the President’s plan? Five retirement experts weighed in on what they understand of the proposal so far. One thought the plan was a good one. Another thought the proposal had merit but more information is needed. One was totally opposed to the idea. The remaining two saw no real point to the proposal since other options for retirement savings are available.
A bad idea. Period!
Mincing no words in her reaction to the president’s proposal is financial planner Susan Johns, at Your Financial Focus said, “This is not what Americans need. It is not what employers need. Education about savings and investments is what is needed.
It is already pretty easy to save — if one wants to do so. You can open an IRA account at your bank or at a no-load mutual fund company with automatic deductions from your bank account,” Johns said
Simply put, “MyRA is a bad idea,” she said.
Missing the point
Not seeing the point of having MyRA is Frank C. Boucher, of Boucher Financial Planning Services.
“My initial reaction was, "Why?" We already have IRA's,” Boucher said, adding is still early to form too firm an opinion.
“On one hand, it makes it easier for people to save. I also like the uncomplicated interest crediting. It can be a good stepping stone for workers who will one day graduate into the more advanced retirement options like 401(k)'s and IRA's,” Boucher said.
Still, “I question whether or not it will result in meaningful savings. This proposal appears to be targeted at lower income workers and this is a demographic whose disposable or "savable" income is limited at best,” Boucher said. “I can envision savers withdrawing their savings as soon as they are faced with an unexpected expense like a car repair or appliance replacement.”
Boucher also said “the proposal places one more administrative burden on employers and, I think employers have more than enough already. I'll be interested to see how the final regulations turn out.”
He further said that was unsure what the primary elements of the program should be. ”I was surprised to learn that this was on the president's agenda with all of the other things that are going on right now. I really believe we have enough savings incentives already. I guess we could require some sort of mandatory contribution for those not participating in retirement plans, but I believe that would be a very hard sell to Congress and consumers alike,” he said
Ultimately, Boucher said he does not see MyRA becoming a reality.
“It comes with a cost when most everybody thinks government spending and involvement in our lives should be reduced. I believe legislators from both parties will fight this,” he said.
Alternatives already serve the purpose
Agreeing that retirement savings alternatives to MyRA already exist is financial planner is Scott Hanson of Hanson McClain.
“Adding yet another government program to address retirement is a horrible idea,” Hanson said “MyRA will be a tremendous failure. Five years from now when evaluations are done to judge the success of the program, I bet we’ll find that we spent more money implementing the program than workers saved in the program.”
Instead, “The Roth IRA already exists, which is ideal for low income savers,” he said.
“The reason why lower income Americans are not saving for retirement isn’t because they lack access to savings vehicles; it’s because they cannot afford to save. Furthermore, I found it ironic that the President is crafting a program to finance government deficits on the backs of the working poor … MyRA invests in government securities,” Hanson said.
Hanson concluded that regardless of the program merits, “I’m sure the Treasury will build out a department to create the MyRA and the Administration will boast about all of the jobs the Treasury created by establishing this program.”
Sounds good, for the most part
One retirement planner that liked what she heard about MyRA is Kerry Hannon, a retirement planning consultant and author of the book “Great Jobs for Everyone 50+: Finding Work That Keeps You Happy and Healthy … And Pays the Bills.”
“I'm a fan of anything that encourages people to sock away money for retirement. Most of us are flying solo when it comes to saving for retirement, so I like the idea that the program will give people an easy way to kick it up. But this proposal is aimed at younger employees, not the older work force that I focus on,” Hannon said.
An immediate drawback with MyRA versus 401(k) plans is that “MyRAs wouldn’t have an employer match, and that's unfortunate. Many employers with 401(k) plans kick in money when their employees contribute, which is critical. Those matches are key components in helping people build retirement funds,” Hannon said
At face value, while the MyRA plan “sounds like a decent one … in truth, the nuts and bolts are not enough. These proposed accounts are focused on low contributions and low returns. Not a winning combination,” Hannon said. “People can't get in the habit of saving small amounts each paycheck. They need to be encouraged to save as much as they can and take some risk with their investments in order to earn a higher return. Otherwise, you set the amount and forget the raise it over time.”
Finally, Hannon said the program should be a combination of a financial education program offered by employers. “Most people don't save enough because they don't want to think about it. Mandatory employer financial education classes should hone in on the steps to realistic retirement planning and the importance of building the habit of saving.”
An excellent retirement savings ‘starter’
Liking what he has heard so far is Erik Carter, a senior financial planner with Financial Finesse. Carter said he was not able to catch all of the State of the Union speech, but he read up on MyRA the next morning.
“As I learned more, I think the proposal is a good one when it’s thought of as a ‘starter’ retirement account or even as places to start short-term savings for things like emergencies, a home purchase or education,” Carter said.
“In addition to the fact that many employees don’t have access to an employer-sponsored retirement, one of the overlooked problems with the current retirement system is that people with little or no savings are often afraid to contribute to a retirement account because they don’t want to tie up their money,” Carter said. “If they do contribute and need access to it, they either can only borrow part of the value of their account with a loan that has to be repaid (generally within 5 years) or they have to jump through hoops to qualify for a hardship withdrawal and can be hit with tax penalties. However, the new MyRA will allow penalty-free access to contributions at any time and for any reason. Of course, that could also be a drawback if people raid their retirement savings frivolously.”
Another potential advantage of MyRA is that existing retirement accounts can use the new MyRA accounts to hold up to $15,000 of the most conservation portion of the portfolio, Carter said.
“Our latest retirement research report showed that 16 percent of households earning less than $60,000 didn’t contribute to their retirement plan at all, despite having one offered by their employer,” he said, adding that in light of that, the most important thing is to get individuals to start actually saving for retirement, especially those at the lower income levels.
“Promoting automatic enrollment and escalation in the MyRA accounts could help with that,” Carter said.