During his State of the Union address last week, President Obama announced a new retirement savings program called My Retirement Account or MyRA.
Labeled as a “starter savings account,” the plan is intended to be a voluntary savings vehicle for those who want to save for retirement, but don’t have access to a retirement plan at work.
How it works
- An employee voluntarily invests after-tax dollars into a Roth IRA invested in U.S. government bonds. Initial investment can be as little as $25 and ongoing contributions can be as little as $5.
- It carries modest interest rates that will vary over time, but are backed by the government.
- Once the account gets to $15,000, the participant must move the balance to a commercial IRA to continue contributing.
- The plan sponsor does not assume responsibility for any aspect of the plan or offer matching contributions. They make it available via payroll deduction at the workplace, but it’s run by the government.
The pros and cons
As with any retirement savings vehicle, MyRA offers both positive aspects and some negative ones, too.
For instance, while a participant doesn’t expect to lose money in this type of plan, they also won’t build up their savings quickly because the interest rate will be low.
And, while MyRAs might seem perfect for people who can save only small amounts, they’ll likely never earn enough to provide for a decent retirement. Participants have to wait until enough savings have accumulated in the MyRA and then roll them into a regular IRA where they could benefit from investment options with greater growth potential.
Finally, with MyRA, money can be taken out anytime without penalty. That would be awfully tempting the first time money gets tight and would take discipline not to tap into MyRA savings.
Let’s work on improving current worksite retirement plans
Having a simple, voluntary savings option is a good thing – and a concept I support. Can MyRA result in incremental improvement to retirement savings in the U.S.? Yes. However, MyRA is not the solution that will solve our nation’s retirement coverage and savings challenges. Employer sponsored 401(k) plans and other worksite retirement plans are a key component of our nation’s retirement system, having helped millions of workers save trillions of dollars. We must continue to focus on enhancements to this system. This includes expanding access to voluntary worksite retirement plans and encouraging greater use of auto-feature plan designs that increase participation and savings for future retirees.
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