By Patrick Temple-West and Ross Kerber
WASHINGTON/BOSTON, Jan 29 (Reuters) - President Barack Obama ordered on Wednesday the creation of a new government-backed retirement account for low-income workers, the myRA, that will be safe and simple, but will top out at only $15,000 per account and offer modest returns.
Unveiled by the president in his State of the Union speech on Tuesday night, the myRA quickly won praise from some experts as an entry point into the world of investing for millions of Americans who now save little or nothing for the future, and get only scant attention from large financial firms.
"It enables lower-income workers to start accumulating money," said Karen Friedman, policy director at the Pension Rights Center, a consumer advocate group, in Washington.
But others questioned whether the myRA, which is aimed at lower-wage workers and those who work for small companies that do not offer retirement plans, would have much impact.
Derek Dorn, a tax and retirement benefits lawyer with Davis & Harman LLP, said: "It is not clear to me that the new myRA ... is going to really move the dial significantly," given the availability of more established retirement accounts.
In early 2013, almost two-thirds of private-sector employees had access to retirement benefits, but only half of them actually took part in a plan, government data show.
Access and participation were lower still for employees of small businesses, many of which lack retirement plans.
Citing such figures in his annual address before the U.S. Congress and at a speech on Wednesday near Pittsburgh, Obama said the myRA would help non-savers.
"It's a new type of savings bond that we can set up without legislation that encourages Americans to begin to build a nest egg," he said at a U.S. Steel Corp plant.
The president wants the myRA program to get underway in 2015. Although millions of Americans would be eligible to participate, the U.S. Treasury Department did not have an estimate of how many might choose to open an account through their employer. Participating businesses will not automatically open the voluntary accounts.
A senior Obama administration official said the accounts will work like Roth Individual Retirement Accounts, or Roth IRAs. Contributions will come from post-tax income, but holdings could be withdrawn tax-free with no penalty at any time.
Initial investments could be as low as $25 and contributions as small as $5. At least initially, payroll deduction will be the way to fund an account.
"At some point, we will consider other ways of allowing people to participate, but no decisions have been made," the administration official told reporters on a conference call.
Each account will hold a new type of Treasury security backed by the government, like a savings bond, so its value will never decline. Deposits will boost the value of that security.
Accounts will earn a variable interest rate pegged to the Thrift Savings Plan Government Securities Investment Fund, a retirement account program available to federal employees.
That would have meant a return of less than 2 percent in 2013, or barely 0.5 percent after accounting for inflation. Still, it tops the average banking savings interest rate.
MyRA accounts will be administered by a private-sector money management firm chosen by the Treasury Department from a field of up to 30 companies in a competitive bid process.
Eligibility for a myRA would be capped at a household income of $191,000. Participants could save up to $15,000, a good start, but well short of covering anyone's retirement, in a myRA, over a maximum of 30 years. Once one of those limits was reached, the accounts would have to be rolled into a Roth IRA.
Employers would need to register in a pilot myRA program by the end of this year for their employees to participate voluntarily, the White House said.
"This plan is designed for the rank-and-file worker that doesn't know that much about the financial system and wants to get a foot in the door," said William Gale, an economist with the Brookings Institution a centrist think-tank in Washington.
He said the program could solve a conundrum for the retirement industry, which has not aggressively chased lower-income investors whose accounts are not as profitable as those of wealthier workers.
"The problem is that these small accounts aren't popular with funds because the administrative costs per dollar of assets aren't that big," Gale said.
Executives from several big asset-management companies said they supported the goal of expanded savings, but wanted to hear more specifics about myRAs.
A spokesman for Vanguard Group Inc, a large retirement assets manager, said myRAs could pave the way for workers to open conventional Roth IRAs, "and eventually enable holders to meaningfully participate in the financial markets."
Cliff Caplan, president of Neponset Valley Financial Partners, a wealth adviser in Norwood, Massachusetts, said he was initially skeptical of Obama's new program. It could create complexity, and some savers might be better off in plans earning higher interest rates.
A better solution might be to expand the use of current vehicles, such as by increasing the amounts that can be contributed to a Roth IRA, Caplan added.
On the other hand, he noted that savers under Obama's plan would benefit from its guarantees.
"The good news is they're safe," he said of the myRA accounts. "But a little risk isn't bad."