NEW YORK Jan 29 President Obama's proposal for myRA, a new retirement savings vehicle, took up only a few moments of Tuesday's State of the Union address, prompting more questions than answers about it.
"It's a new savings bond that encourages folks to build a nest egg," Obama said.
Will myRA work for you? Here's what you need to know:
Q: What is the plan, exactly?
A: Details are still emerging, but the basics are that these accounts will allow Americans with incomes up to $191,000 to invest small amounts per paycheck - as low as $5 - in a savings bond-like product. The rate of return will be low, probably in the 1 percent range and akin to what workers get from the Thrift Savings Plan, which is a retirement plan for federal employees. The government will guarantee the rate won't fall below zero, so investors will never lose money, and growth will be tax-free.
After an individual accumulates $15,000, the account would roll over into a traditional individual retirement account.
The reason for the $15,000 threshold is that that is the level at which financial institutions break even on investment accounts, said Dallas Salisbury, president and chief executive officer of the Employee Benefit Research Institute.
"They don't want really small accounts," he said, and it doesn't make sense for individuals to pay the fees on accounts with small amounts of money.
Q: What impact will $15,000 have on retirement savings?
A: It won't provide much of an annuity or ongoing retirement income. Instead, it will be more of an emergency fund for workers who otherwise are saving nothing, says Greg McBride, senior financial analyst for Bankrate.com.
The program is geared to lower-income workers, especially those who have no workplace retirement plans. About 25 percent of Americans currently do not save for retirement, according to a study released this week by TIAA-CREF.
"It's a jumping off place. It's not the be-all, end-all of a retirement nest egg," says McBride.
Q: Will individuals have access to the money while it's in the accounts?
A: You will likely be able to withdraw the money for any reason, tax-free, which is what worries Ed Slott, founder of IRAhelp.com.
"To really work, you have to look at it as a long-term savings account and not a slush fund," he said.
Q: Could this be part of a diversified portfolio even if you have a income above the limit?
A: Likely not. Savers who are looking for fixed income options can find many more options in traditional IRAs or Roth IRAs, or their workplace 401(k) accounts. "You don't need the government to help you invest in fixed income," says McBride.
Q: What details are missing?
A: Key unanswered questions revolve around how employers will structure the plans, how many of them will join the program and what will be offered to people who are not on any sort of computerized payroll process.
"I think that employers that do not use automated payrolls - and there are tens of millions of them - they probably will not want to do it," said Salisbury.
McBride wants to know if people will be automatically signed up for the plan - which is what many 401(k) plans have used to boost savings rates. He also wants to see details on whether pre-tax money or post-tax money will go into the accounts.
In addition to these concerns, Slott is confused by the "myRA" name, which even President Obama seemed to fumble in his speech.
"It's too hard to say," he Slott.