MyRA launch shows we need to get over our problems with mandates

The Obama Administration launched the myRA this week – a Roth IRA with payroll deduction features invested in conservative government securities. MyRA is a praiseworthy but small-bore initiative aimed at encouraging retirement saving for the more than 40 million Americans who don’t have accounts. In my Reuters column this week, I describe it as a kid’s bike with training wheels at a time when we need a sleek new automobile to get us where we need to go on retirement security.

That’s less a knock on the myRA than recognition of a simple truth. This is the best the White House could do in the face of unrelenting ideological opposition to building the car we really need: a universal automatic IRA featuring robust but simple investment options that would enroll every worker in the U.S. without access to an employer-sponsored plan. We don’t have that today because of two very politically-toxic words: “employer mandates.”

The U.S Treasury has been beta testing myRA for the past year, and rolled out nationally this week. It’s aimed at workers who don’t have access to a retirement savings plan at work, and want to save – but haven’t yet done so.

In a nutshell, the myRA is different from a regular Roth or traditional IRA in the following ways:

  • No fees or minimum contribution levels
  • Principal is guaranteed by the Treasury – you can’t lose money.
  • Very limited investment choices – in fact, just one. The accounts earn interest at the same variable rate paid on the Government Securities Fund offered to federal employees in the Thrift Savings Plan. That fund returned 2.31 percent in 2014 and has had an average annual return of 3.19% over the ten-year period ending December 2014. That’s barely enough to keep even with inflation.
  • MyRAs can’t hold balances higher than $15,000. At that point – or earlier – accounts must be rolled over to a private sector Roth account.

So, why aren’t we getting powerful automobile we need – or at least a racing bike?

At a conference in Chicago this week, retirement policy experts from the U.S. and United Kingdom compared notes on the National Employment Savings Trust (NEST), the U.K.’s six-year-old government-sponsored defined contribution plan. It’s not yet a Jaguar, but it’s off to a great start and already comarable to a Mini (the well-made re-born version). Offering NEST is mandatory for employers who don’t have their own retirement plans, and it even features mandatory employer matching contributions. NEST already has signed up 34,000 employers and 2.5 million workers.

mark iwry

J. Mark Iwry, senior adviser, U.S. Department of the Treasury

NEST is a cousin of the national auto-IRA that the Obama Administration has been asking Congress to approve since 2010 – an idea opposed by Republican lawmakers because of its mandatory participation feature (although it doesn’t feature employer matching contributions).

The auto-IRA is one of those ideas that once looked bipartisan. It was cooked up by David John, senior strategic policy advisor at AARP, back when he worked at the conservative Heritage Foundation. His co-author was J. Mark Iwry, then working at the centrist Brookings Institution and today a senior adviser to Treasury Secretary Jack Lew. He has been a key mover on the White House attempts to implement the auto-IRA, and now the myRA.

MyRA also is a cousin of the state-sponsored initiatives moving forward in Illinois and California, which would be mandatory for employers who don’t offer their own plans. Neither the auto-IRA nor state plans feature employer matching contributions, but the state-level offerings also will be more robust investment vehicles featuring low-fee target date funds. Those plans got a boost recently when the White House directed the Department of Labor to clear the regulatory path for their creation.

David-John-cropped

David John, senior strategic policy advisor, AARP

“MyRA is a tool – state initiatives are a solution,” says John, noting the investment cap and lack of equity investment. “The state initiatives are still badly needed – and also potentially a national initiative – to enable people to save sufficient amounts that can supplement their Social Security.”

Mandates became ultra-toxic among Republicans following passage of the mandate-driven Affordable Care Act, likely strangling the auto-IRA in its crib.

During one panel discussion at the conference, Iwry and John talked about the challenge enacting national auto-IRA legislation in the U.S. Iwry explained why he thinks the auto-IRA’s requirements are very different from the ACA mandates:

[I’ve spent] much of my time working to implement the Affordable Care Act, and believe that those requirements are appropriate and necessary, they are true mandates. The employer must provide coverage, and it involves a certain cost. Not so for the auto-IRA. The employer does not have to incur cost other than, we believe, a trivial administrative cost – and we have proposed a tax credit to recognize the additional cost that the employer is taking on, however modest.

Speaking about the U.K.’s success in launching NEST, Iwry added:

We’ve been more modest in our ambitions – and proven right, because so far we’ve been unable to persuade Congress to enact a requirement on employers of a certain size who have chosen not to adopt a plan to simply let employees use their payroll systems to save in a meaningful way through auto enrollment – without a penny of employer money or match being required. Indeed, we’ve said none is permitted under our federal auto-ira proposal, and a number of the state applications of that auto ira – first and foremost because we wanted to do no harm [to the existing retirement system]. If an employer is ready to make a contribution, we’d like that employer to step up to a 401k or pension plan or at least a Simple IRA.

John noted that while auto-IRA would require employers to take certain actions, employees maintain the freedom to choose:

This really is all about improving the ability of individuals to have a comfortable, secure retirement. It’s not anything beyond that. Individuals are free at all times to say that they want to invest more or less, invest in something else, or not participate at all. So, it’s totally in their control – it’s not in the government’s control or anything along that line.

And [all the research and focus groups tell us] that automatic enrollment is incredibly popular with workers up and down the income scale, among all racial groups, men and women and the size of the employer.

We’ve also found that when you go to a small business and test this idea, when you say, “look I want you to do something here, the immediate reaction is ‘Oh hell, not another one – we don’t want to do it, we’re opposed to it. But the more that you explain the process, the more the employer came around and recognized that this was something they could do and it wasn’t a big deal.

Still, John thinks myRA will work with the audience it is targeting – people who have not been in the habit of saving – especially the guarantee that you can’t lose money. “The NEST experience shows that if savers lost money in first couple years, that could discourage them from continuing to save.

“But saving is like exercise. It’s a habit you get into and build. So long as you have a positive experience, you get acclimated and keep going.”

If you’re ready to start exercising your saving muscles, myRA accounts can be opened at myRA.gov or by calling 855-406-6972. Accounts can be funded from a paycheck, bank account or a federal tax refund.

Speak Your Mind

*