President Barack Obama’s new retirement accounts lack the most popular features of 401(k) plans. They offer no matching contributions, no prospect for eye-popping returns and no track record of employer support.
Obama’s plan also relies on low-income workers being willing to do something they often can’t -- set aside money in savings when they have immediate needs.
As Obama took to the road to promote the accounts this week, investors, bankers and financial planners questioned whether the accounts would achieve what Obama wants: building a retirement safety net for millions of people who aren’t saving.
“It’s a step in the right direction,” said Robert Reynolds, the chief executive officer of Boston-based Putnam Investments, which has $150 billion in assets under management. “I really have a question about how effective it’s going to be, even though I like the concept.”
The MyRA program, which will open by the end of 2014, would let Americans open individual retirement accounts that invest in government bonds. They could start with as little as a $25 initial contribution and contribute $5 per pay period after that. The principal, funded with post-tax contributions, would be protected and could be withdrawn without penalties.
To White House officials, those are the selling points, along with a feature uncommon in long-term retirement planning: guaranteed return of principal, because the money will be invested in a government bond fund set up for that purpose.
The aim of the program, which is being implemented without approval from Congress, is to encourage millions of people to build savings that can supplement Social Security benefits.
Obama’s plan is a narrower version of a requirement that employers automatically enroll workers in IRAs. He has included that plan in his budget and Congress hasn’t advanced it.
“I don’t think anyone thinks this is going to magically turn us into a nation of savers,” said William Gale, director of the Retirement Security Project at the Brookings Institution in Washington. “But for a particular group it seems like it could be part of the solution.”
About 68 percent of U.S. workers had access to pensions or retirement savings plans as of March 2013, with 54 percent participating, according to the Bureau of Labor Statistics.
Senior administration officials briefing reporters yesterday didn’t estimate how many people would enroll in the plans. They said they hoped the program would be particularly attractive to women, part-time workers and members of minority groups without access to retirement accounts at work.
“For those of you who don’t have a 401(k) on the job, don’t have a pension on the job, don’t have a mechanism to start saving, especially young workers, you can get started now,” Obama said yesterday at United States Steel Corp. (X:US) near Pittsburgh.
For employees and employers, the so-called MyRA accounts would differ from more familiar 401(k) plans.
Workers would have only one investment option -- a basket of government bonds like that available to federal workers through their retirement plans. The bonds have maturities between four and 30 years.
The G fund in the federal Thrift Savings Program returned 1.89 percent in 2013, enough to outpace the 1.5 percent increase in the Consumer Price Index. The Pacific Investment Management Co.’s Total Return (PTTRX:US) Fund fell 1.9 percent in 2013.
The guaranteed return in the government program may make a difference for potential investors who are contributing as little as $5 per paycheck, said David Certner, legislative policy director for AARP, which represents older Americans.
“At those kinds of levels, diversification makes less of a difference,” he said. “Having a guaranteed, safe bond return at no cost, no fee, for a starter saver may be attractive to some people.”
Employees wouldn’t receive an employer match, though the contributions would qualify them for the saverâs credit under existing tax law. A married couple with an adjusted gross income of up to $36,000 a year is eligible for a tax credit equal to 50 percent of contributions to retirement accounts.
The credit diminishes as income increases and is unavailable to individuals with adjusted gross incomes of more than $30,000 a year and married couples with incomes exceeding $60,000. The saver’s credit is paid through tax refunds, not a contribution into the account.
Also, employers would have to agree to allow payroll deductions. Unlike with 401(k) plans, they wouldn’t have to contract with a financial services company, follow nondiscrimination rules or have a fiduciary responsibility.
Companies can already offer such programs with a range of investments and relatively few do, said Derek Dorn, a partner at Davis & Harman LLP in Washington.
“It can’t hurt,” said Dorn, an aide to former Senator Jeff Bingaman, a New Mexico Democrat who backed a requirement for automatic enrollment. “Perhaps this will be an opportunity for some. And perhaps the greatest benefit will be the visibility that the program gives to payroll deduction IRAs.”
Treasury Secretary Jacob J. Lew said the program would begin operating by the end of the year. The government will start looking for a financial agent with experience in administering IRAs. The Treasury Department, not the individuals, would pay fees to the agent.
The accounts would be open to people with annual household income up to $191,000 whose employers choose to participate.
The plans would have a maximum balance of $15,000, after which money would have to be rolled over into a private-sector Roth IRA with a range of investment options. The plans would be portable so workers could keep them if they change jobs.
The Investment Company Institute, a Washington-based trade group for the mutual-fund industry, welcomed the proposal as a complement to “existing vibrant and competitive private-sector retirement offerings,” according to a statement.
Senator Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, called the plan an “interesting” idea before criticizing Obama’s decision to press ahead without legislation.
“I don’t think he should even attempt to do that,” Hatch said in an interview. “I mean, there’s a limit to using executive orders, and he needs to be very circumspect with regard to using them.”
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