WEST MIFFLIN, Pa.—President Barack Obama signed a presidential memorandum Wednesday authorizing the Treasury Department to create a new retirement-savings vehicle aimed at workers who don't have access to traditional retirement accounts, such as 401(k)s. That group includes about half the U.S. workforce.
Called "myRAs," the accounts were among the proposals Mr. Obama unveiled during his State of the Union address on Tuesday. The president drew additional attention to the issue Wednesday as he traveled to a steel plant in Pennsylvania. Mr. Obama told the steelworkers that the accounts were a "pretty good deal" that would help more people save for retirement.
The new accounts will be structured much like Roth IRAs, in which account holders contribute money after income taxes are paid, and any investment gains and withdrawals are tax-free.
To underscore his focus on executive action, the president pulled out a pen while he was still onstage and signed the paperwork greenlighting the retirement savings accounts.
Roth IRA accounts—as opposed to traditional IRAs, which allow pretax contributions—make sense for the younger and lower-income workers the myRA program is trying to reach, said David John, senior strategic policy adviser at the AARP Public Policy Institute in Washington.
The myRA accounts will feature just one investment option—a Treasury bond that will offer the same variable interest-rate return as the benefit federal employees get when they enroll in the Thrift Savings Plan Government Securities Investment Fund. That fund had an annual return of 1.47% in 2012, with an average annual return of 3.61% from 2003 through 2012.
While investors' principal will be protected, the investment gains are expected to be low. Assuming an annual return of 1.5%, it would take someone who contributes $50 every two weeks nearly 11 years to amass $15,000, according to calculations by Vanguard Group, the nation's second-largest retirement-services provider.
In part because participation in the accounts is voluntary, it isn't clear whether they will catch on with employees, who must opt in to the program.
Alicia H. Munnell, who directs the Boston CollegeCenter for Retirement Research, said access to retirement savings plans "is the most serious problem we have, and a proposal like this sheds light on the problem, which is a good thing." But unless participants are automatically enrolled in the accounts, she adds, "you are not going to solve the coverage problem."
Individuals who earn up to $129,000 and couples who earn up to $191,000 are currently eligible to contribute as much as $5,500 a year to a Roth IRA (or $6,500 if they are 50 or older). But only one in 20 Americans who are eligible to make such tax-advantaged contributions do so on a regular basis, said AARP's Mr. John. The same income and contribution limits will apply to myRA accounts.
Still, the White House is betting the new vehicles will help people get into the savings habit—in part because employers who choose to participate can automate the savings of employees who opt into the program via payroll deduction. Moreover, the new myRA accounts allow initial investments as low as $25, with subsequent payroll deductions of $5 or more per pay period. Participants will pay no fees for the accounts.
Employees who switch jobs also will be able to continue to fund the accounts, which will be held at a financial-services company the Treasury will select. Once an account's balance reaches $15,000, participants would be required to roll them over to an IRA at a private-sector financial-services company, where they would be free to select from among an array of investment options.
Initially, the accounts will be offered through employers, but access eventually may be expanded so that individuals can invest on their own, administration officials said.
Two things, anyone can open an IRA today, why do we need a whole new program? Secondly, will people with regular and Roth IRA's be forced into this new system instead of being able to 'Keep your retirement plan if you like your retirement plan'?
