Retirement Accounts for the Rest of Us
How new federal and state programs could bolster your financial future
President Obama returned to a favorite theme in his State of the Union address this week: expanding access to retirement savings options in the workplace. His proposals rolled out in conjunction with the speech included Auto-IRAs for employees whose firms don’t offer plans; tax cuts to encourage businesses to adopt the idea and broadening 401(k) coverage to more part-time workers.
Some or all of the president’s ideas may be dead on arrival in the GOP-dominated Congress, but outside Washington, expansion of workplace retirement saving is anything but.
Illinois just became the first state to adopt a similar idea with its Illinois Secure Choice Savings Program. And variations of that are gaining ground around the country, with proposals in more than half of the states, according to AARP, which has been promoting the idea in statehouses around the country.
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Meanwhile, the Obama Administration this year is rolling out the myRA — a voluntary program (first announced in Obama’s 2014 State of the Union address; it rhymes with IRA) designed to help workers at companies without retirement plans set aside small amounts from their paychecks in a tax-sheltered, savings bond-like product.
Retirement Plan Coverage Is Lacking
These types of ideas couldn’t be timelier, since ownership of retirement plan accounts has fallen sharply in recent years. Just 40 percent of households owned IRAs, 401(k)s or traditional pensions in 2013, down from 48 percent in 2007, according to the latest Federal Reserve Board Survey of Consumer Finances. And the Center for Retirement Research at Boston College estimates that only half of private sector workers participate in a retirement plan.
Here’s a look at how the new retirement accounts work:.
MyRA: This is a scaled-down version of the Auto-IRA, which the White House has included in several budget proposals, but has not been able to push through Congress. The U.S. Treasury was able to launch MyRA without legislative approval, though.
The MyRA is available to any worker with direct paycheck deposit whose employer agrees to participate, so long as household income is below $191,000 a year (joint filers) or $129,000 (individual filers). MyRA accounts are backed by the U.S. government and don’t carry administrative fees. Contributions are invested in a new U.S. Treasury security, currently paying roughly 3.4 percent.
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Savers can contribute up to $5,500 a year and can build savings for 30 years or until their myRA reaches $15,000 — whichever comes first. After that, myRA balances will transfer to private-sector Roth IRAs. Withdrawals are tax-free, subject to the same rules governing Roth IRA withdrawals.
Auto-IRA: If this Obama administration proposal becomes law, every employer with more than 10 employees that doesn’t have a retirement plan will be required to enroll its workers in an Auto-IRA. (Workers could opt out if they choose.) After-tax contributions would be made via payroll deduction, and banks, mutual funds and insurers would likely run the plans for the employers. Investment choices would be more varied than in the myRA.
Secure Choice: This is an initiative from states and its features vary state by state.
In Illinois, starting in 2017, companies with 25 or more workers that have been in business for at least two years and don’t offer retirement plans will be required to automatically sign up workers for a state-sponsored Roth IRA. (Workers will be able to opt out if they choose.) Employees will then be able to salt away 3 percent or more of after-tax pay; earnings in their accounts will grow tax-free.
The default investment in this retirement account will be a target-date fund, which reduces the allocation of higher-risk stocks as the account holder nears retirement; there will also be four other fund choices. The aim is to keep fees low — not exceeding 0.75 percent annually.
The sponsor of the Illinois plan, Senator Daniel Biss, hopes to add annuity payout options in the future date. “It would be good to have a mechanism for drawing down your savings as a lifetime income stream,” he says. He’d also like to see an auto-escalation feature on contributions which, each year, would automatically increase the percentage of pay an employee contributes.
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California passed enabling legislation for a similar plan in 2012 and a feasibility study is underway. The California plan differs from Illinois’ in two key respects: it would be geared to produce conservative returns tied to Treasury bond rates. And, at retirement, the individual’s account would convert to a pension-style annuity.
Ideas like the myRA, the Auto-IRA and Secure Choice have two features that are key to getting more people started on a savings path: low fees and automated contributions. And they address a simple reality: Currently, too many American workers lack access to employer-sponsored retirement plans.