Parts of the financial world are abuzz over a plan to create government-backed retirement savings plans. The Obama administration recently released a presidential memo that ordered the U.S. Treasury to start creating these kinds of accessible retirement investment products; myRAs will move with workers as they change jobs, and allow them to make capital gains from small contributions.
Helping make small money count
One of the big ideas behind the new program is that other kinds of retirement savings are often off the table for, or go unnoticed by, many workers. The president believes that offering these more accessible options will get more people's attention and encourage them to save.
The creation of myRAs also deals with what experts call "the small saver problem." A recent CNN Money article cites David John, a senior strategic policy advisor for the AARP Public Policy Institute. John explains that with many kinds of investment options, small contributions are eroded by administrative costs.
With myRAs, the government has stated that employers will not have to administrate or contribute to the plans. Part of the government's support will be in figuring out how to offer the plans to workers and allow them to accrue more reasonable amounts of interest from contributions as low as $25 per paycheck.
Rules on myRAs
First of all, a lot of people who understand the choice between a traditional IRA and a Roth IRA will be surprised to learn that myRA accounts will work like Roth IRAs -- in other words, your contributions will be taxed before they go into your account. In some ways, this seems counterintuitive: Part of the appeal of up-front retirement savings, for many of us, is that we get to put money in on a pre-tax basis (so that it looks like more and resembles "tax savings right now"). Financial planners point out that when retirees withdraw money from traditional IRAs, it often triggers lower tax burdens, because the person's annual income will be low or non-existent. But it's a mistake to discount the psychological effect of pre-tax paycheck deductions: In many cases, workers agree grudgingly because they can see that their take-home pay doesn't fall by the full amount of their contribution because of lower withholding taxes.
However, the idea behind treating a myRA like a Roth IRA is that the money can grow and grow tax-free. Yes, you will pay all tax on your money before it goes into the account, and that will hurt, but with patience, a worker will see those small amounts grow over time.
MyRAs and returns
Although myRA money will grow tax-free and will be tax-free at retirement as mentioned above, there's another disclaimer here, which is that returns will be relatively meager. With White House reports that expect myRAs to earn from 1.5% to 2% in interest, this relatively risk-averse fund principle isn't going to generate huge amounts of gains compared to the stock market.
The bottom line here is that the government is determined to encourage Americans to save for retirement any way they can -- as public pensions continue to disappear, that "three-legged stool" classically made up of pensions, Social Security, and private retirement funds has become a frantic warning and a kind of ad-hoc mandate for employers and workers to work together in securing private investment options for lifetime careerists, some of whom may change jobs many times and encounter many financial difficulties over the course of their careers.
Columnist Michelle Singletary talks about the demise of the traditional pension and its renovation of the three-legged stool.
"Now it is more like a bicycle," Singletary said in a widely syndicated column in which she voiced "cautious optimism" about the new White House plan. However, Singletary also added a note of warning, that she feels a slight investment in a myRA may be the furthest extent to which a single worker will go, when he or she will need much more. She also addressed the actual gains projected for these accounts, suggesting that they may not even keep pace with inflation -- in which case, it's usually better to buy a basket of stocks or some other non-currency asset.
MyRAs simply add access to the equation, and the government is essentially adding its voice to those of financial advisors, journalists, and other public officials looking at the new retirement crisis in this country. The message? Save now and save as much as you can to support yourself later.
It's a warning that requires our attention.
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Justin Stoltzfus is a contributor to WiserAdvisor.