Of all the proposals President Obama put forth in his State of the Union speech last night, the most boring-sounding one may end up being the most consequential. The idea the president proposed was for a "MyRA," a new type of retirement savings account – stay with me here! – that could make it easy for low-income workers to save money by filling starter IRA accounts with a new type of safe, government-backed bond, and then converting them to real IRAs later on.
President Obama was light on details about what the MyRA would look like, and we won't know exactly what it is until Treasury says more later today. (All he said is that the plan "encourages folks to build a nest egg" and "guarantees a decent return.") But my guess — and more important, the guess of people like Helaine Olen and Michael Kitces, who know what they're talking about — is that the MyRA will basically be an automatic-enrollment program for people who can't invest in traditional IRAs.
Basically, there are two big problems with IRAs and 401Ks. First, not everyone can get them: About 75 million Americans don't have access to a retirement plan through their employer, and if you want to open a retirement account on your own, you usually have to have some money already. (Bank of America, for example, requires a $2,000 deposit just to open a basic IRA.) And second, of the people who are eligible for retirement plans, not everyone signs up. Lots of people don't understand the enrollment process, or they do understand and just lose the forms in a box somewhere and never get around to it.
For years, politicians have tried to fix the enrollment problem by automatically signing people up for their IRAs and 401Ks, rather than making them opt in. Studies have shown that auto-enroll programs like this produce something like a 90 percent enrollment rate, since very few people care enough to opt out once they've been signed up. It's one of the classic "nudge" tactics proposed by Cass Sunstein and other behavioral economists to promote good financial planning.
The only problem, politically, is that auto-IRA programs require congressional approval. And so far, despite the fact that President Obama has included it in his budget every year since he was elected, Congress hasn't budged.
Recently – and this is where MyRA comes in – the Obama administration found a way to solve both of these problems at once, without going through Congress. The president could use an executive order to create a type of safe, low-risk government-backed bond – they called it an "r-bond," for "retirement" – that would earn a low rate of interest and carry a government guarantee. Those bonds would be put into people's retirement savings accounts automatically as they earned money, in the same way that employers withhold a percentage of each paycheck and put it into a 401K plan. Then, once people's starter accounts got big enough that Fidelity or Bank of America were willing to manage them as IRAs, all of those r-bonds could be rolled over into new, private plans, while preserving all the tax advantages that IRAs get.
Here's how the WSJ describes the MyRA program:
Workers would be allowed to invest if they make less than $191,000 a year. There wouldn't be a tax penalty if the investments are withdrawn, and initial investments could be as low as $25, the White House said. Subsequent investments could be as low as $5, automatically deducted from someone's paycheck. Once someone accumulates $15,000 in their account, or they have the same account for 30 years, it would have to be rolled over into a privately run individual retirement account.
Nobody knows yet if the MyRA plan President Obama proposed last night will resemble Treasury's r-bond plan. But if it does, it will be a huge win, especially for low-income earners who are often shut out of the retirement planning discussion. If you work part-time or aren't eligible for a full retirement plan, you'll be able to open one of your own, with no risk of losing what you put in. And, when you've got $15,000 saved up, you can convert that account into a real IRA without taking a tax loss. It's not a total solution to income inequality, but it should make it a little easier for people on the bottom of the income spectrum to start putting money away for retirement. That's a good thing. And even better? Congress can't stop it.
Update: Treasury Secretary Jack Lew is speaking about the MyRA plan this morning, and the details seem to be largely as expected: a program geared toward low-income workers that will make it easy for them to roll over their conservative starter accounts into IRAs, and that can be instituted without Congressional approval.
On Air Force One, Treasury Secy Jack Lew says MyRA savings bond modeled on the Roth IRA. Interest is tax free till worker retires.— Mark Knoller (@markknoller) January 29, 2014
Lew says MyRA easy to start: $25 to open. $5 min per deposit withdrawn from each paycheck.— Mark Knoller (@markknoller) January 29, 2014
Lew says US Treasury can create and implement MyRA savings bond program without congressional action.— Mark Knoller (@markknoller) January 29, 2014