A day after President Barack Obama gave the go-ahead for the Treasury Department to create a "starter" savings account, experts are weighing whether it will be worthwhile or just another ignored investment tool.
Critics note, for instance, that the so-called myRA will do little to overcome the huge shortfall in retirement savings among so many workers. The conservatively invested accounts, though they won't lose money, won't make much of a return, either.
And the myRA is voluntary, so it's unclear how many business will even offer it.
"Anytime you can make it easy for employees to contribute to a savings plan, that's got to be positive. And payroll deduction is a great way to do it," says Tim Steffen, director of financial planning for Robert W. Baird & Co. in Milwaukee.
"The downside," Steffen adds, "this is just added complexity to the retirement savings system. Do we really need yet another form of retirement savings account?"
We already have the 401(k), traditional and Roth IRAs, the Simple IRA, SEP IRA, the individual 401(k), a 457 and 403(b). (In fact, Iowa Sen. Tom Harkin today announced legislation that would create a new privately run retirement plan - USA Retirement Funds -- that would provide portability like a 401(k) with lifetime payments like a traditional pension.)
The myRA is expected to get off the ground in a pilot program by the end of the year. With the myRA, workers will open a Roth IRA account with as little as $25 and can make even smaller regular payroll contributions. The money would be invested in government securities and earn the same variable interest as one of the funds in the federal employees' retirement plan. Savers can't lose principal.
And once the account reaches $15,000, workers must roll the money into another private-sector Roth IRA.
That last feature is a major drawback, says Steffen, who predicts that workers will cash out the account instead of rolling the money over.
"That's where this breaks down," he says, unless there is some mechanism in place that automatically does the rollover for the workers.
Workers also shouldn't expect the myRA to finance a decades-long retirement. Even $15,000 growing at a rate of 3 percent annually would only amount to about $36,409 over 30 years.
"If this is your sole retirement savings, this is not going to do it," Steffen says.
The myRA is largely designed for those who don't save now and don't have a retirement plan at work.
"It's a good idea for the right people," says Ed Slott, an IRA expert.
Workers for years have had the opportunity to open a Roth IRA on their own, Slott says.
"There are many people who could have a retirement account and just don't," he says. "Maybe it will get some people on board to kick-start their retirement."
With a Roth, workers can withdraw contributions without penalty. This could turn myRA into an emergency fund.
"That's good and bad," Slott says. Good, if this easy access encourages people to save; bad, if they are raiding the account every few weeks for non-emergencies, he says.
"That defeats the purpose of it," Slott says.
Businesses won't have to offer myRA to workers, which raises the question of whether any will.
Molly Day, a spokeswoman with the National Small Business Association, says it's too early to know how many of the group's 65,000 members would adopt the myRA.
The accounts are not supposed to cost businesses any money to offer, and employers aren't expected to have any fiduciary responsibility, like with other retirement plans. However, Day says, there is concern that businesses might have to take on some of those burdens at a certain point or be affected in other ways.
"There is some kind of informative role they will play there," she says. And "any time you're talking about payroll deductions, there is going to be an administrative cost for small business."
Day also points out that the contribution limits and investment yield of the myRA are low. It's not like the myRA will help small employers compete with the benefits that giants like Google can offer, she says.
Jeffrey Brown, a finance professor at the University of Illinois, says the myRA is smartly designed and its limitations are the things he likes.
The account is simple, requires little of the employer and will be easy to administer, he says. It doesn't compete with other retirement plans and is a way to get non-savers to start squirreling money away.
And if workers aren't happy with the modest yield of the account, he adds, they can roll the money into another IRA at any time and invest in other things.
"I'm not sure it's going to have as big of an impact as we would need or like. But there is almost no downside to it," he says. "Don't let the perfect be the enemy of the good."
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