By Beth Pinsker
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.
"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's 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 fees on accounts with small amounts of money.
Q: Is this better than a savings account?
A: The key benefit is that it will get people started on a segregated retirement account, which will have tax-free growth. The rate is also better than current saving account rates, which are typically under 1 percent.
Q: What impact will $15,000 have on retirement savings?
A: It won't provide much of an annuity or ongoing retirement income. A savings account valued at $15,000 "is not going to help anyone in terms of a secure retirement and maintaining a good standard of living," said Joe Ready, director of institutional retirement and trust at Wells Fargo.
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 21 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.
For instance, if a person making $30,000 saves 5 percent a year, which is $1,500, it would take 10 years to get nudged into a private sector IRA, calculated David Certner, legislative policy director for AARP.
"The rates of return are lower, but you have the advantage of having no fund costs. If you start early and it compounds, it can be significant," Certner said.
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 other retirement savings plans?
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's the difference between myRa and another proposal, called the "auto-IRA"?
A: Although not highlighted in the State of the Union speech, there is another IRA proposal on the President's agenda, the "auto-IRA." This is also geared to the 50 percent of Americans who have no access to employer-sponsored retirement plans.
Certner pointed out that the auto-IRA would require congressional legislation because it involves mandated actions by employers and employees, so it has not moved forward right now. The myRA, in contrast, was something that the Obama administration could do at the agency level because it is voluntary and works within existing legislation.
"It's basically a Roth IRA that has one investment option," Certner said.
Q: What kinds of companies could offer it?
A: Experts say the proposal is aimed at small businesses - which are less likely to offer some kind of retirement savings option than large companies.
When it comes to offering a retirement plan, a big barrier for a small business is the time it takes to administer a plan. "Cost and fiduciary oversight, plus the overall education for employees, are other key factors," Ready said.
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 how employees will be enticed to sign up.
"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.
In addition to these concerns, Slott is confused by the myRA name, which even Obama seemed to fumble in his speech.
"It's too hard to say," Slott says.
Q: If implemented, will this get more Americans to save more for retirement?
A. Probably not, said Alicia Munnell, director of the Center for Retirement Research at Boston College. That's because people are unlikely to take advantage of a retirement savings program unless they are forced to.
"This shines light in the right place; it has a very clever design, but the bad thing is without auto enrollment, you're unlikely to see much action," Munnell said.