Making Retirement Savings Easier May Not Be So Easy

MyRA and Auto-enrollment IRA Proposals

American’s aren’t saving enough for retirement. Most experts generally agree with this statement. With two recent initiatives, Washington is seeking to reduce barriers to retirement savings, including employee inertia. In a divided Congress, the jury is still out on whether employee inertia will operate as a barrier, as well as whether the latest proposals will appeal to employers and employees.

Introducing the MyRA

President Obama heralded the myRA, as in “my IRA,” in his State of the Union address in January. Employers that don’t offer a retirement plan and employees who aren’t currently saving for retirement are the MyRA’s intended target.

The Treasury Department’s myRA fact sheet describes it as a “starter retirement savings account that will be offered through employers.” Similar to a Roth IRA, myRA contributions would be after-tax, but withdrawals would be tax-free. It would be available to single filers with incomes up to $129,000, and joint filers with incomes as high as $191,000.

A streamlined payroll deduction system (details not yet defined) is intended to entice employers unwilling to take on another administrative burden. Payroll deductions would be funneled into a pool of U.S. treasury securities whose blended yield would be linked to the Government Securities Investment Fund of the Thrift Savings Plan for federal employees.

If an employer already has a retirement plan, will they consider adding the myRA to their benefits lineup? The incremental administrative requirements, if limited as advertised, would probably be less a factor in your consideration of whether to add an myRA to your benefit plan.

The biggest downside to the myRA is the $15,000 cap on how much participants could accumulate. When this threshold is reached, employees would be required to convert the myRA account to a Roth IRA. In addition to the cap, an individual must convert the myRA to a privately run (vs. government run) Roth IRA at the earlier of reaching the cap, or having maintained the MyRA for 30 years.

Enticing Holdouts

The myRA — with its $5 per minimum, per contribution period — might attract participants who do not want to (or do not have the extra income) to invest in a retirement plan. Granted, $5 contributions, even if made daily, won’t fund a sizable retirement income. But the myRA’s goal is to overcome inertia, in a way that auto-enrolling employees in a 401(k) plan cannot always accomplish.

To participate in the programs pilot phase, employers must sign up by the end of 2014 to offer MyRA’s to employees.

Force-feeding Retirement Savings

Another strategy to get nonsavers on the retirement savings track is requiring employers that do not offer a retirement plan to auto-enroll employees in an IRA. President Obama has unsuccessfully urged Congress to enact such legislation.

There is another legislative proposal along those lines — the “Universal, Secure and Adaptable (USA) Retirement Funds Act.” Under the most recent refinement of the proposal, employees would be auto-enrolled with a 6% deferral rate.

Something New

Will the myRA or auto-enrollment IRA become a reality? No one knows at this point. The myRA is a voluntary program, not a required one, so it’s unlikely that it will gain much traction. Because many workers have access to a 401(k) plan, there would be little benefit to adding a myRA. If an employer does not sponsor a retirement plan, both myRAs and auto-enroll IRAs have the potential to help jump-start participants on the path to saving — even if it’s a minimal amount.

Sidebar: Another Effort to Limit Retirement “Tax Breaks” for the Wealthy

Regardless of what happens to the myRA proposal and the USA Retirement Funds Act (see main article), President Obama is also seeking to limit “inefficient retirement tax breaks” now available to the “wealthiest” Americans. The theory is that doing so will offset a tax revenue loss caused by a new auto-enroll IRA scheme, and perhaps even put a visible dent in the federal budget deficit.

Reviving a proposal he made last year, the president would limit aggregate retirement plan contributions (including applicable defined benefit plans) to a sum actuarially determined to fund an annual benefit of $210,000 at age 62, based on a joint and  survivor benefit. It would take roughly $3.2 million to fund such a benefit for a 62 year-old today.

The actuarial calculation would be made annually and applied to the next year’s contributions. “If a taxpayer reached the maximum accumulation, no further contributions or accruals would be permitted,” according to the proposal. The consequence of making excess contributions is that they would be taxed. Plan assets (excluding any excess contributions) would continue to grow on a tax-deferred basis.

Under the proposal, these new rules would take effect next year. However, it’s highly unlikely that Congress will have acquired a greater appetite for the proposal this year than it did last year.

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