President Barack Obama sparked a national conversation about retirement security this week by proposing a way to help low-income Americans build a nest egg, a move that was welcomed by financial industry officials and investment advisers — though some are skeptical.
In his State of the Union address on Tuesday, he announced the creation of so-called myRA retirement savings accounts that would invest in a guaranteed government bond fund and be offered by employers through Roth individual retirement accounts.
Later in the week, several lawmakers came out with retirement-savings legislation. Sen. Tom Harkin, D-Iowa., introduced a bill to create a universal retirement plan with lifetime income benefits, while Sens. Susan Collins, R-Maine, and Bill Nelson, D-Fla., offered a measure that would encourage small employers to offer retirement plans and raise the ceiling on employee contribution limits.
The goal of myRA is to get more Americans into the retirement savings system.
“What that means is for those of you who don’t have a 401(k) on the job … don’t have a mechanism to start saving — especially younger workers — you can get started now,” Mr. Obama said in a speech to workers Wednesday at U.S. Steel in West Mifflin, Pa.
That kind of rhetoric resonates with Robert Reynolds, president and chief executive of Putnam Investments. He regularly visits Washington to encourage lawmakers to address retirement security.
“It’s movement in the right direction,” he said.
“We need to encourage all Americans to save,” he said. “Now it’s going to be about execution, getting all people to participate.”
Mr. Obama’s focus on retirement security also was endorsed by Chip Castille, managing director and head of the U.S. retirement group at BlackRock Inc
“We’re going to have more people talking about the retirement crisis, which is important,” he said. “It’s exciting to see that.”
The first step is the myRA, which would have the same tax treatment and follow the same withdrawal rules as a Roth IRA. Workers could open the account with $25, make automatic contributions in amounts as small as $5 per month and carry it with them from job to job.
Enrollment would be voluntary, and tax-free withdrawals could be made at any time.
The proposal drew praise for targeting the approximately half of Americans employees who don’t have a workplace retirement plan and criticism for not requiring them to enroll.
“Getting people to engage and sign up is going to be the hard part of it,” Mr. Reynolds said.
The accounts would be available to people who make up to $191,000 annually.
Once a myRA builds to $15,000, or after 30 years, it
would have to be rolled over into a private-sector Roth IRA. A pilot program will begin with several employers by the end of the year.
"It's not going to go anywhere. It adds to the alphabet soup of all the different kinds of IRAs."George Papadopoulos, owner of an eponymous investment advisory firm.
Although the myRA accounts will be sponsored by the government, the Treasury Department will hire a financial firm to administer the program.
The agency will conduct a competitive bid process involving 15 to 30 firms, according to a senior administration official.
Some of the investment companies that would fit the bill were circumspect about the applying for the job.
“We would need more details,” Mr. Reynolds said.
Eileen O’Connor, a spokeswoman for Fidelity Investments said that the company is reviewing the program.
In an e-mail, David Hoffman, a spokesman for The Vanguard Group Inc. said that the firm would need “additional information on the expected size of the plan, number of participants and average balance, among other details,” before deciding whether to make a bid.
Some investment advisers are skeptical about Mr. Obama’s initiative.
The voluntary sign-up will undermine the effectiveness of the program, said George Papadopoulos, owner of an eponymous firm.
“I was intrigued by it because the point of getting more people to save for retirement is noble, until I realized they would still have to opt in,” he said.
“People will procrastinate, and they won't sign up,” Mr. Papadopoulos said.
“It's not going to go anywhere. It adds to the alphabet soup of all the different kinds of IRAs,” he said.
Michael Eisenberg, owner of Eisenberg Financial Advisors, doubts that the accounts will gain popularity.
“They’re probably not going to become widely accepted,” said Mr. Eisenberg, who is a certified public accountant and investment adviser. “If there’s a way to tweak it to make it mandatory and have [participants] opt out, that would be better.”
It is ironic that Mr. Obama touted the growth of the stock market over the past five years just before introducing a retirement plan based on a government bond, said John Hauserman, president of RetirementQuest Wealth Management.
“It's not a good long-term portfolio prescription for the majority of people, particularly those who are low- and middle-income and need long-term growth,” he said. “He proposes a retirement plan that won't let people be in the stock market.”
But another adviser embraced the idea, praising it as a way to get people into a savings habit and transition them to private-sector plans.
“Any time we can bring solutions to the middle market and below to help our consumers save and take on personal responsibility for retirement, we would be in favor of that,” said John Nichols, president of the Disability Resource Group and president of the National Association of Insurance and Financial Advisors.
Expanding the practice of saving at work to more income levels appeals to Mr. Castille.
“The 401(k) system has served workers of all levels of income and net worth well for 30 years,” he said. “The myRA has the opportunity to bring similar benefits to a group that has been underserved by workplace savings programs.”
Many observers interpreted Mr. Obama as taking a swipe at tax incentives for retirement savings contributions, such as those for 401(k) plans.
He encouraged Congress to “work with me to fix an upside-down tax code that gives big tax breaks to help the wealthy save, but does little or nothing for middle-class Americans.”
Mr. Obama didn’t mention 401(k)s by name, but a White House fact sheet after the State of the Union address said that “current retirement tax subsidies disproportionately benefit higher-income households, many of whom would have saved with or without incentives.”
That kind of characterization draws the ire of Brian Graff, chief executive and executive director of the American Society of Pension Professionals and Actuaries.
An ASPPA study last year showed that 80% of 401(k) plan participants make less than $100,000 annually and that households making more than $200,000 get just 17% of the tax benefits.
“The 401(k) is a Main Street savings plan,” Mr. Graff said.
“It's completely wrong to suggest they only benefit the wealthy,” he said. “It's just ridiculous.”
The ASPPA is conducting a lobbying effort called
Save My 401(k) that has focused on generating congressional support. Now it also will target the White House.
Other statements that Mr. Obama made about retirement savings, such as challenging Congress to pass a bill that would establish auto IRAs at businesses that don’t offer retirement plans, were underscored by savings advocates.
“I do think there would be bipartisan support for anything that helps Americans save more,” Putnam’s Mr. Reynolds said.
