President Obama’s plan to tackle the U.S. retirement crisis is ambitious and well-intentioned but unlikely to have much of an effect, experts say.
In his State of the Union address, Obama proposed a new type of retirement account for the 4 in 10 Americans who don’t have access to 401(k) plans at their jobs.
The accounts, dubbed MyRA, would offer guaranteed investment returns, no fees and tax-free profits.
But Obama’s proposal rests on a pair of uncertain assumptions: that employers would be willing to offer the accounts and that financially stretched low-income workers would agree to participate in them.
In contrast to 401(k) plans, companies would not offer matching contributions, typically the biggest inducement for workers to get involved.
“I don’t expect it to accomplish any increase in retirement savings,” said Teresa Ghilarducci, an expert in retirement issues at the New School in New York.
The president signed a directive Wednesday ordering the Treasury Department to create MyRA (my retirement account). A pilot program is expected to be rolled out this year.
The MyRA effort is designed as a “starter” program in which employees can accumulate up to $15,000 before transferring savings to tax-free Roth individual retirement accounts.
Workers could open MyRA accounts with as little as $25. The minimum additional contribution is $5 per paycheck.
Money would be invested in a government bond fund that’s been offered to federal employees for years. Principal would be protected so that workers would never lose money.
But they probably wouldn’t earn significant returns. In 2012, the fund had a 1.47% return. The 10-year average annual return was 3.61%.
Obama’s proposal reflects a growing belief that 401(k) and similar workplace retirement plans benefit upper-income wage earners but do very little for lower-income people.
Not only do people in higher tax brackets have money to contribute to 401(k)s, they get sizable tax breaks for doing so. Lower-income people have less money and get much less of a tax advantage.
Repeated studies have shown that Americans are not saving enough for retirement. The average 401(k) balance at the end of 2012 was only $63,929, according to the Employee Benefit Research Institute.
Only 59% of U.S. workers are eligible to join 401(k) plans, according to EBRI. And of those with access to the plans, only a bit more than 7 in 10 participate.
To entice U.S. employers to offer MyRA accounts, the government will pay administrative costs, including hiring a financial firm to manage the program.
But given that many American companies have been trying to slash benefit costs in recent years, it’s unclear whether employers would offer the accounts.
International Business Machines Corp. caused a stir in late 2012 when it was revealed that the company would start making lump-sum 401(k) matching contributions once a year rather than every pay period. That saves IBM the cost of making contributions to workers who leave the company mid-year.
“There’s always going to be a certain number of employers that for purely humanitarian reasons will care about employees,” said Mike Alfred, chief executive of BrightScope Inc., a 401(k) information company in San Diego. “But the hard reality is in the boardroom more employers are thinking about how to maximize their own profitability.”
A big question is whether workers themselves would take part in MyRA accounts.
To boost 401(k)s, the federal government allows companies to automatically enroll workers in plans. New employees at companies that do so automatically have a portion of their salary channeled to a 401(k) unless they specifically object.
The logic is that employees are far likelier to participate in a 401(k) if they have to opt out rather than opt in.
The MyRA program, by contrast, would not have automatic enrollment.
“If you don’t have automatic enrollment then not a lot of people are going to use it,” said Alicia Munnell, director of the Center for Retirement Research at Boston College.