saving

Finally, a retirement plan friendly to smaller savers?

February 3, 2014: 11:29 AM ET

Under the president's plan, myRA retirement accounts would be available to U.S. workers who don't have access to a 401(k) plan. 

By Jean Chatzky

140203111645-barack-obama-state-of-the-union-620xaFORTUNE -- In last week's State of the Union address, President Obama introduced the myRA (pronounced My-R-A, like I-R-A, not Myra, like your great aunt). It's yet another retirement account to add to the likes of 401(k)s, Roth IRAs, and SIMPLEs -- only this one is geared to the roughly half of all workers who don't have access to employer-sponsored retirement accounts (though it will also be available to households earning less than $191,000 a year who want to supplement their 401(k)s.)

Workers at companies that decide to offer myRAs will be able to open an account with just $25, then contribute as little as $5 per paycheck. The money will be invested in the same government bond fund used for the federal employees' Thrift Savings Plan, which means investors will never lose principal. On the flipside, they likely won't gain much either (the 10-year average annual return on this investment is 3.6%). And like Roths, contributions are made with after-tax money and can be withdrawn at any time, tax and penalty free.

There are a lot of good things about these new accounts, says Dallas Salisbury, president and CEO of the Employee Benefits Research Institute. They're fee-free; therefore, solving the problems that small savers have when they open an IRA only to have much of their balance eaten up by expenses. And, like 401(k)s, contributions will be made through payroll deductions -- which means that you can make a good decision to save, one time, and it will happen over and over again.

They also provide an entrée for smaller savers to the world of big financial services firms. Once accounts reach $15,000, they'll be transferred to Roth IRAs. "Essentially in a few years, the government will be delivering a bunch of customers with moderate nest eggs to private sector financial firms – at which point they'll think it might be worthwhile to have the accounts," says Bill Gale, director of the Retirement Security Project at The Brookings Institution.

Perhaps the best thing, though, is that they give us a shot of creating a larger culture of saving -- and a greater number of savers -- in America. "One of the iron clad rules of retirement savings is: Whenever you started, you should have started sooner," Gale says. That's not an easy thing to get people to do. Saving is not natural for human beings. Our lizard brains are still wired to kill it and eat it; delaying gratification is not in our DNA. But, where saving money is not pleasurable (for most), having money saved is quite pleasurable. Once you see a pot of money sitting in your account you can take satisfaction in it. You feel more confident, more independent, more free.

MyRAs open the door to that experience for more people. But in order for them to be successful, they're going to need to take a page from modern-day 401(k)s, too. In 2006, the Pension Protection Act enabled companies to automatically enroll their employees to their 401(k) plans; those who didn't want to participate, had to opt out. This has been hugely successful. Survey after survey shows that auto-enrollment routinely boosts participation rates into the 80% range, sometimes higher.

Making that happen in the new myRAs, however, will require congressional approval -- something the president has tried, and failed, to garner for IRAs before. According to the White House Fact Sheet on the myRA, "The President's budget will propose to establish automatic enrollment in IRAs (or "auto-IRAs") for employees without access to a workplace savings plan, in keeping with a plan that he has proposed in every budget since he took office. Employers that do not provide any employer-sponsored savings plan would be required to connect their employees with a payroll deduction IRA."

Is it likelier to succeed this time around? "Most advocates on both sides of the issue think it's a modest but good idea," says Karen Friedman Executive Vice President of the Pension Rights Center. Fingers crossed, she's right.

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