Americans aren’t saving enough for their elder years. We all know this, but the numbers still are startling. The typical value of 401(k) and IRAs for workers nearing retirement was about $120,000 in 2010, according to the Federal Reserve. Only 42 percent of private-sector workers ages 25 to 64 have any pension coverage from their job.
“As a result, more than one-third of households end up with no coverage at all during their entire work lives and others, who move in and out of coverage, end up with inadequate 401(k) balances,” write Alicia Munnell, Rebecca Cannon Fraenkel and Josh Hurwitz of the Center for Retirement Research at Boston College. Clearly, more needs to be done.
President Obama rightly focused on the retirement savings shortfall in Tuesday’s State of the Union address. “A Social Security check often isn’t enough on its own,” he said. “And while the stock market has doubled over the last five years, that doesn’t help folks who don’t have 401(k)s.”
Obama’s executive order creating the MyRA — My Retirement Account — is a worthwhile step. The MyRA is a starter IRA that’s structured like a Roth IRA. It’s funded with after-tax contributions through payroll deduction. Withdrawals are tax-free at retirement. The investment choice is similar to a safe, government-backed savings bond. Like a savings bond, the principal value is protected. The initial investment can be as low as $25 and additional contributions can be as little as $5.
The retirement savings will go into an account set up by the Treasury Department. There will be a pilot program for employers who agree to sign up by the end of this year. The account is open to all workers earning less than $191,000 annually. The maximum balance in a MyRA will be $15,000. Once that savings threshold is reached, the money is rolled over into a private-sector Roth IRA.
Initial reaction from the financial services industry is positive. The design is smart, low-cost and reaches out to an underserved population of workers. For instance, Larry Fink, chief executive of BlackRock, the world’s largest asset manager, said in a series of tweets that he was “tremendously encouraged” by the president’s proposal. Fink wrote: “I hope this ignites a much-needed conversation about income in retirement.”
I hope employers that don’t offer their employees a retirement savings plan rush to embrace the MyRA. I also hope Congress moves swiftly to build on the MyRA initiative. Without much effort, lawmakers could make a huge difference to the retirement prospects of younger boomers, Gen-Xers and millennials.
Boosting retirement savings is a goal that should unite conservative and liberal lawmakers. For example, lawmakers could easily improve the design of defined-contribution retirement savings plans like the 401(k) to boost participation and savings. A good plan offers automatic enrollment to boost participation (a shift encouraged by the Pension Protection Act of 2006); automatic escalation of contributions to boost employee savings; a limited menu of investment choices, such as target date funds; low fees, and in-plan annuity options allowing employees to establish a guaranteed monthly income for life.
By itself, the MyRA is expected to have a minor impact on retirement savings. But every increase counts. Hopefully, it reignites a desire among Washington lawmakers to do something practical to improve America’s inadequate retirement savings system.