On January 28th of 2014, President Obama delivered his State of the Union address, which laid out many of his administration’s policy goals for the coming year, including a number of initiatives he intends to implement by executive order. Amongst the list was the creation of a new “MyRA” retirement account, a type of “safe, easy-to-use starting savings account” for Americans, intended to help improve the country’s retirement savings shortfall.
As further details have emerged, though, it turns out that the MyRA may be little more than a standard Roth IRA, funded via payroll direct deposits, and invested into a government bond fund, albeit with $25 initial and $5/paycheck ongoing contribution levels that are smaller than what financial institutions typically allow. As a result, many critics of the new MyRAs have emerged, from those who think the accounts will create more confusion by adding to the patchwork of retirement account choices while creating little new value (and worse, defaulting young people into fixed income investments without a chance at the long-term growth of equities), to those who complain that since the accounts are still purely voluntary to contribute to and those contributions remain liquid and accessible (as is standard for all Roth IRAs) that participation will be limited and those in need will just tap the accounts to spend later anyway.
Nonetheless, the reality is that the new MyRA is unique in its ultra-low direct deposit contribution limits, and while its fixed-income investment option isn’t ideal in the long-term, the MyRA is “forced” into a private Roth IRA rollover that can be reinvested in a more diversified manner anyway once the account balance reaches $15,000. As a result, even if the program just gains limited traction, there may be a significant boost of $15,000 MyRA “rollover planning” in just a few years. And given that the MyRA can be implemented by executive order without Congressional approval – as President Obama has stated he intends to do – the reality is that the MyRA really does appear to be coming soon, with a pilot program rolling out by the end of the year!
Understanding the MyRA
The White House’s State of the Union Fact Sheet lays out the high-level goal of the President’s new MyRA (which stands for “My Retirement Account”) proposal as follows:
Creating “myRA” – A Safe, Easy-to-Use Starter Savings Account to Help Millions of Middle Class Americans Save for Retirement. Starting to save is just the first step towards a secure retirement. Workers must have a place to invest their hard-earned savings that provides an appropriate balance of risk and return, and many private sector providers do not offer retirement savings options tailored to smaller balance savers. Our retirement system should help these potential savers and encourage them to begin building their retirement security. The President is using his executive authority to create “myRA” (my Retirement Account) – a new simple, safe and affordable “starter” retirement savings account that will be available through employers and help millions of Americans save for retirement. This savings account would be offered through a familiar Roth IRA Account and, like savings bonds, would be backed by the U.S. government.
While the initial details themselves were murky in the immediate aftermath of the State of the Union address, in the days that followed, further details came forth about exactly how the MyRA rules will work. In a separate MyRA fact sheet, the White House explained the key points as:
– The MyRA will be structured as a Roth IRA. Contributions can be withdrawn at any time (as with any Roth IRA).
– Contributions to a MyRA are allowed for “low and middle income” households earning up to $191,000/year.
– There will be no fees to set up and use the accounts (the Treasury has indicated that MyRA accounts will be created online once available), and employers will have no responsibility for administering them.
– Contributions will occur as an automatic payroll direct deposit, with amounts as low as $25 initially and ongoing contributions of $5 per paycheck.
– Assets in the MyRA will be invested in bonds comparable to the “G Fund” (Government Securities Investment Fund) currently offered inside the government’s Thrift Savings Plan (TSP), which provides a variable interest rate that trends with government bonds but a principal guarantee that the account balance will never decline.
– Amounts can be rolled into a ‘private’ Roth IRA at any time; once the account balance reaches $15,000, or after a maximum of 30 years, the accounts will have to be transferred to a private Roth IRA. (The Treasury has indicated that the final rules/process for MyRA rollovers will be detailed when the MyRA program officially launches later this year.)
– The accounts will be offered through an initial pilot program by the end of 2014 via employers who choose to participate (implying that wider rollout isn’t likely until 2015 at best).
In other words, the basic gist of the MyRA is that it’s simply a Roth IRA, funded with potentially very small dollar amounts using the existing payroll deduction systems with the Treasury, with contributions invested in the TSP’s G Fund or a functional equivalent. Given that the MyRA is really “just” a Roth IRA with a different custodian and a unique investment option, this also implies that:
– With the MyRA following normal Roth IRA rules, not only can contributions be withdrawn anytime (tax-free and penalty-free), but ostensibly a withdrawal of earnings will still be subject to the normal Roth IRA rules to be eligible for tax-free withdrawals of growth, including the Roth earnings 5-year rule and the requirement to be either age 59 1/2, deceased, disabled, or (for a limited amount) for a first-time homebuyer.
– The $191k income limit for the MyRA appears to coordinate with the normal AGI income limits for Roth contributions for married couples. This implies that the White House Fact Sheet threshold of $191k is probably just for couples, and that for individuals it will be $129k (the normal AGI income limit for individuals looking to contribute to a Roth IRA) (This has subsequently been confirmed in a Treasury Department Fact Sheet). Similarly, this suggests that couples over $181k (or individuals over $114k) will be partially limited in their MyRA contributions as well, per the normal Roth IRA contribution phaseout rules. Presumably anyone who turns out to be over the AGI income limits will have to recharacterize their MyRA Roth contribution as a traditional IRA with a ‘normal’ private IRA custodian.
– Since the MyRA is just a Roth IRA, it won’t be possible to contribute cumulatively to a MyRA and a Roth IRA. It’s the same limit, so contributions to one count towards the limit of the other as well. Also, since the MyRA is just a Roth IRA, the maximum annual contribution to a MyRA will ostensibly still be the same Roth IRA annual contribution limit of $5,500 in 2014, or $6,500 for those over age 50 who are eligible to make the $1,000 catch-up contribution.
Although stated as being for those who don’t have access to employer retirement plans, it’s not clear if the MyRA will specifically be limited to only employers who don’t offer such plans, or if they’ll simply become available to any/all employers and their employees via the payroll tax system that handles payroll deductions. (A recent fact sheet from the Treasury states that the MyRA will be available for savers who “either do not have access to an employer-sponsored retirement savings plan or are looking to supplement a current plan” implying that in practice, it will be available to any/all who wish to participate.) Since the accounts are ultimately just individual Roth IRAs, this also means they will implicitly be ‘portable’ as all IRAs are – i.e., not actually directly tied to a specific employer (as other employer retirement plans like 401(k)s are).
In addition to proposing the MyRA, it’s notable that the President’s State of the Union Fact Sheet also reiterates his commitment to (re-)proposing an automatic enrollment IRA (which likely will end out attaching to the MyRA system once established?), and reiterates some key proposals noted in last year’s Treasury Green Book, including limiting new contributions to IRAs once the aggregate account balances are over $3.2M, and capping the tax deduction for retirement account contributions at 28%. However, unlike the MyRA – which the President can create by executive order (and stated he intends to do s0) – these changes for automatic IRAs, limiting IRA contributions, and capping the deduction for pre-tax IRA contributions, would require Congressional approval, suggesting that their odds of being implemented are not high given current gridlock in Congress (though legislation has been attempted, such as Congressman Neal’s Automatic IRA Act of 2013 proposal last year).
Putting The MyRA In Context
Already, much confusion seems to exist regarding the MyRA. It was initially promoted as an alternative for the larger percentage of workers who don’t have access to save with an employer retirement plan, yet the reality is that 100% of those workers – with or without an employer retirement plan – already have access to an IRA simply by virtue of having earned income. And while there are contribution income limits on Roth IRAs, the same limits will apply to the MyRA as well. For those whose income is too high for a Roth IRA, they can always contribution to a traditional IRA, which can be done without any income limits; at the most, income limits for traditional IRAs only limit their deductibility, not the ability to contribute in the first place, and if the worker (or his/her spouse) doesn’t have access to an employer retirement plan then pre-tax deductible traditional IRA contributions are already allowed regardless of income!
So why bother? Some government cynics have already noted that the program to ‘default’ new savers to buy government bonds within a MyRA is ‘conveniently’ timed to match up with the onset of the Federal Reserve’s taper of its own balance sheet purchases (albeit of not exactly the same type of bond). Yet proposals for something like a MyRA as part of a broader approach to establishing automatic enrollment for IRAs goes back years; in fact, President Obama’s proposals predate the Fed’s QE programs altogether, dating back to part of the proposals in his first budget issued in 2009, which in turn were attempting to build on the successes being seen in the 401(k) environment since auto-enrollment was widely expanded as a part of the Pension Protection Act of 2006. Even then, the default investment was anticipated to be a form of government bonds being labeled the “R Bond” as discussed by Mark Iwry, deputy assistant secretary for retirement and health policy with the Treasury. While the Treasury is empowered to create the R Bond – and just recently it was still being discussed as an option – automatic enrollment in IRAs requires Congressional approval, and thus far there has been no successful legislation to implement it, leading President Obama to look to alternatives.
Thus, in essence, the MyRA might be viewed as a probable stepping stone to an auto-IRA plan in the future; in essence, it creates some of the initial infrastructure to do so, and notably while automatic enrollment in IRAs itself seems to be Dead-On-Arrival in Congress right now, as just noted the MyRA program can be launched directly by President Obama’s executive order, as it is technically building on the existing rules and program for the Treasury’s direct deposit government savings bond program (just using a Roth IRA as a wrapper).
Financial Planning Implications Of The MyRA
For many financial planners, the reaction to the MyRA may well be “so what” given that it’s really little more than a Roth IRA that allows small-dollar contributions via direct deposit and invested into a government bond fund. After all, the reality is that investors can already set up direct deposit contributions to a Roth IRA (either directly from the employer or indirectly via automated transfers from a checking account to which paychecks are being direct deposited). And the opportunity to invest in an interest-bearing account with stable principal/NAV is hardly new, between available money-market funds and short-term government bond funds, or using I Bonds (albeit not available in a Roth IRA), not to mention simply using existing FDIC-backing for short-to-intermediate term bank CDs. Last year the G fund earned 1.89%, (following a 1.47% return in 2012) and the 10-year compound growth rate from 2003-2012 was only 3.61% (bearing in mind that interest rates were much higher than today for a portion of that time period), which is not all that different from other intermediate-term CDs or intermediate government bond funds over a similar horizon.
In addition, most planners will likely note that for young investors, choosing a default savings option of a stable-principal fixed income investment is not exactly best for long-term accumulation and compounding; instead, at least some exposure to equities is likely desirable. After all, we do at least use Target Date Funds – notwithstanding some of their caveats – that have some equity exposure, as one of the QDIA (Qualified Default Investment Alternatives) in automatic-enrollment 401(k) plans. To be fair, one of the challenges of accessing equities-based investments is that they’re harder to facilitate at small dollar amounts, especially in individual retirement accounts (as opposed to employer retirement plans where small employee account balance can be aggregated); as a result, many institutions require that even automated contributions be limited to $100 at a time and often have a $1,000 minimum. On the other hand, robo-advisor Betterment provides a diversified portfolio including equities with no minimum account size or contribution (though some fees for sub-$1,000 balances), and while Wealthfront has a $5,000 minimum it charges no fees at all until the account balance reaches $10,000. And if all that’s desired is a fixed income option, banks like USAA offer CD IRAs with a $250 minimum and $25 ongoing automatic contribution. And some research has shown that if contribution limits are defaulted to being “too” small, those otherwise inclined to save may actually come down to the minimums and save less, even while those who weren’t saving at all might begin to save more, suggesting the issue is much more nuanced than “just” making it easier to contribute at small dollar amounts.
Nonetheless, it is important not to underestimate the potential for the MyRA to gain some traction. While the reality is that they may be unappealing to the typical client of a financial planner, who likely already is comfortable taking advantage of the broader Roth IRA rules and flexibility – and for whom the potential to make $5 contributions was not likely a factor – for those who are truly starting out with their first Roth IRA, there’s arguably a lot to be said for the sheer potential simplicity and convenience of the MyRA, and the opportunity to contribute at such low threshold amounts makes it feasible for those who are young to really try out the “Pay Yourself First” approach of just automating a small contribution directly from income. While they can sign up for IRAs themselves, they rarely do; one study cited from EBRI found that for those earnings $30k – $50k, only 5% of those without an employer retirement plan were setting up their own IRA (while 72% of those covered by an employer retirement plan were participating), which leaves a lot of room to improve IRA participation with an easier process. Assuming, of course, that the MyRA sign-up and enrollment process really is easy enough to encourage participation, which remains to be seen. But then again, many young people today are still “unbanked” and wouldn’t even have another small-contribution direct deposit option!
Similarly, while some might criticize the choice of a government bond as a default investment option for new savers – at best, it will barely keep pace with inflation and offer little-to-no real return over time, trading off a no-risk principal guarantee for a huge exposure to inflation risk in the long run – the reality is that at very small account balances, the fact that the individual saves is far more important than the return he/she earns upon that savings. This is especially true for those that get a 10%-50% immediate “matching” boost from the Federal government in the form of the Retirement Savings Contribution Credit, also known as the “Saver’s Credit”. Even before accounting for the credit, the reality is that it can often take 5-10 years of compounding growth before the returns on the account have a greater impact than the contributions to them, and by that point many steady MyRA savers would have already reached the $15,000 “tripwire” where a rollover becomes necessary and the account can be reinvested – and reallocated more broadly – when it is transferred to a private Roth IRA. And such a conservative default investment option avoids the risk of young savers having an ill-timed market decline shortly after they begin to save, which – even if the dollar amounts are “small” – can be a material loss to them and potentially scar/scare them away from saving in the future.
On the other hand, perhaps the greatest challenge to the MyRA at this point is that while ongoing contributions can be automated, it is not an automatic enrollment account (at least at this point?). Accordingly, it still requires people to manually opt themselves into the program, and while encouraging enrollment via payroll direct deposit might be slightly easier – and therefore slightly more effective – than just encouraging people to go directly to various financial institutions to create such an account, it’s not clear it will really do much to boost enrollment. And of course, arguably for many young savers, the problem was never the relative convenience of setting up an account, nor even the minimum contribution amounts/limits and potential fees, but the simple fact that they don’t feel they have enough money left at the end of the month to be savers in the first place, and obviously this solution does nothing to address the issue of the general economic wage growth and employment malaise of so many of today’s young savers. In addition, the reality is that because the MyRA is simply a Roth IRA – which allows penalty-free and tax-free withdrawals of contributions at any time – the accounts can also easily be “raided” at the first sign of financial trouble for a young saver as well. Which means ironically, while the libertarian-style view to government policy on retirement is critical of the MyRA for being an indirect subsidy (in the form of administrative costs and fees being absorbed by the Treasury and ultimately the taxpayer) and being redundant to today’s retirement savings options and therefore unnecessary (or worse, that it may actually hurt by creating so many retirement choices that it paralyzes new savers into inaction as they try to figure out traditional IRA vs Roth IRA vs MyRA vs bank account vs brokerage account), others on the more ‘government-paternalistic’ side have suggested that the solution will fail because it’s not automated enough, still leaves too much choice in the hands of savers, and the accounts are too liquid and flexible and that a better alternative would include mandatory savings with less access (e.g., expanding Social Security)!
In the intermediate term, the MyRA proposal also indirectly raises the stakes on the recent scrutiny of fiduciary duty regarding IRA rollovers; while the MyRA-to-private-Roth rollover would probably technically be outside the scope of Department of Labor’s fiduciary proposal, it may fall squarely in the purview of FINRA’s recent Regulatory Notice 13-45 cautioning brokers on their actions when conducting IRA rollovers. After all, if the MyRA program really “works” there will be a slew of ongoing $15,000 maxxed-out-MyRA rollovers from “first-time” retirement savers occurring on a regular basis starting sometime around 2017 or so! For some, that is a nice business opportunity – especially financial institutions trying to focus more on working with the young. For others, this becomes a sad opportunity for predatory product sales targeting $15,000 “minimum” contributions. More generally, the reality seems to be that the MyRA structure, because it is hard-wired to a Treasury-administered government bond fund, will not likely allow for advisors to be involved and get paid for supporting the accounts, creating a clear incentive and conflict of interest for advisors to encourage clients to rollover their MyRAs whenever they can (which may often, but not necessarily always, be desirable). On the other hand, “Ready to roll over your MyRA?” may become a new standard entry point for young savers to begin working with financial advisors and financial institutions a few years from now (though it remains to be seen sometime later this year exactly how this rollover provision will be implemented by the Treasury).
In the end, the MyRA really only has two truly unique offerings for the marketplace: 1) automated contributions at smaller dollar amounts than traditional financial institutions (as low as $5 per pay period); and 2) access to an investment option equivalent to the TSP’s G Fund (though bank CD and government bond funds are already available with roughly comparable options). Nonetheless, it does introduce an opportunity to make the savings process a little easier (and ‘lucrative’ given no employer match but the implicit Federal government “match” of up to 50% in the form of the Saver’s Credit for low-income workers), where getting started with a first retirement plan may involve little more than checking a payroll contribution box (if the paperwork truly turns out that simple?). And the MyRA program has a built in tripwire system to ensure that people reevaluate their investment decision once the account grows in size. In this manner, the new MyRA proposal is essentially little more than a small “nudge” kind of solution to improving retirement savings – albeit perhaps such a small nudge that it won’t actually accomplish much – but we’ll see what happens, especially if the MyRA proves to be the groundwork for a broader automatic IRA enrollment process in the coming years! Yet aside from the conservative default investment option – which has limited impact at smaller dollar amounts anyway – there seems little reason for financial planners not to encourage young savers to at least start with a MyRA in the future.
But the bottom line is that the MyRA can be implemented via the Treasury with an executive order from the President, doesn’t require Congressional approval (it appears even the cost to administer the new accounts/program would simply subsumed as part of the Treasury’s existing appropriation), and is unlikely to be lobbied against by the financial services establishment (who generally weren’t seeking accounts at these sizes anyway and would probably be happier just accepting them as $15k rollovers in a few years, and in fact the Treasury has announced it will bid out administration of the MyRA system to a private sector money management firm in the coming months rather than implement the entire program itself). As a result, it looks like the MyRA really is about to become a part of the retirement planning establishment in the near future, so it’s time to get up to speed!
So what do you think? Will the MyRA help young/new savers to begin saving, or is the problem more about what they earn than their ability to save? Is the conservative investment default really a problem? Where do you see the MyRA fitting into the retirement picture? Is this a good use of government/taxpayer resources to encourage retirement savings?