The Department of the Treasury and the Internal Revenue Service released new guidance that is “designed to expand the use of income annuities in 401(k) plans.”
By Linda Koco
The White House has posted some details on the new retirement savings bond program proposed by President Barak Obama in his State Of The Union address. Highlights follow.
Called MyRA, for My Retirement Account, the program will create retirement savings bonds for Americans who currently lack access to workplace retirement savings plans, according to a fact sheet on the plan.
The U.S. Government-backed bonds will be offered at little or no cost at the workplace.
Eligible participants will be low- and middle-income households earning up to $191,000 a year.
Workers could save up to $15,000, or for a maximum of 30 years, in their MyRA accounts before transferring their balances to a private sector Roth IRA. Workers can also roll the balance into a private-sector retirement account at any time, even before reaching the dollar or age maximum.
An initial investment could be as low as $25. Even smaller contributions, as low as $5, will be allowed through payroll deduction. Employers will not administer or contribute to the accounts.
Participation is voluntary, and workers can keep their same MyRA account upon changing jobs. Contributions can be withdrawn tax free at any time.
Those who elect to contribute will earn interest at the same variable interest rate as offered in the federal employees’ Thrift Savings Plan (TSP) Government Securities Investment Fund.The bonds will have principal protection, so the account value will never go down.
The proposal calls for an initial pilot program to be offered to workers of employers who choose to participate by the end of 2014.
The fact sheet answers many questions but also invites other questions. For example, the fact sheet does not say whether the workers’ contributions to the bonds are tax-deductible. However, the statement aligning the program with Roth IRAs makes it all but certain that such contributions, as with Roth contributions, are not deductible.
The fact sheet also does not say whether all employees of a firm — part-time as well as full-time — will be eligible to participate. However, they most likely will, given the government-bond structure of the plan and the goal of helping more Americans take a first step toward saving for retirement.
The fact sheet says the MyRA accounts will be “targeted to the many Americans who currently lack access to workplace retirement savings plans.” However, it does not say whether use of the MyRA accounts will be “limited to” this market.
Retirement and advisor groups will do doubt seek clarity on that last point. They will not want to see the new starter plans compete with existing 401(k) or other retirement plans or with private sector plans that are now in the process of being established.
They would not, for example, want to see a small employer drop an existing small-group 401(k) plan and then arrange for the starter plans — which would purportedly be simpler and cheaper — to take its place. The industry practitioners would not only lose a case that way; they would see the employee participants with whom they have worked lose the opportunity to continue contributing to the more full-featured 401(k), complete with employer matching.
On the positive side, some retirement and advisor groups will probably want to explore how to coordinate their own efforts to set up private retirement plans with the proposed government-backed starter plans. The maximum contribution amounts on the proposed start-ups are very low, so the possibility of coordination may be viable, especially when workers start approaching those maximums and especially since they can “roll the balance into a private-sector retirement account at any time.”
The fact sheet also lists some other retirement savings proposals being forwarded by the Administration.
The Department of Treasury has posted additional information at its ReadySaveGrow website. For instance, a fact sheet tells about how employees can start the program: They signup online and then set up automatic payroll direct deposit with their employers, who will then send the direct deposits to each participating employee’s MyRA on payday. Treasury expects to begin "rolling out" MyRA’s in late 2014.
Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda may be reached at firstname.lastname@example.org.
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