In recent weeks, the Obama Administration has taken the two most important steps in nearly a decade to increase access to retirement savings for more than 55 million Americans who currently do not participate in a retirement saving plan.
The Treasury Department’s myRA program, launched this month, will help new savers and the self-employed start accounts without risk or fees. And earlier this week, the Department of Labor clarified rules that will make it easier for states to create retirement savings plans for small business employees.
The new myRAs provide another way for new savers to build small nest eggs. They will also help consultants, contract employees, and part-time workers save for retirement or for emergencies.
For employees, myRAs are payroll deduction savings accounts designed to meet the needs of new savers and lower income workers. They have no fees, cost nothing to open, and allow savers to regularly contribute any amount. Savings are invested in US Treasury bonds, so savers can’t lose principal, an important feature for low-income workers who might otherwise abandon plans if they face early losses. Those who are not formal employees and thus lack access to an employer-sponsored plan can participate in myRA through direct withdrawals from a checking or other bank account.
As the growing “gig economy” creates more independent workers, the myRA will be a valuable entry to the private retirement system. These workers might otherwise retire on little more than Social Security. All workers can build myRA balances by redirecting income tax refunds into their accounts. Because a myRA is a Roth IRA (that is, contributions are made from after-tax income), savers can withdraw their own contributions at any time without penalties or tax liability.
When a myRA reaches $15,000, it must be rolled into another account, and Treasury may make it possible for workers to transfer these savings into funds managed by one of several pre-approved private providers. MyRAs won’t replace either state-sponsored plans or employer-related pension or retirement savings plans. However, they will make it possible for new and lower-income savers as well as the self-employed to build financial security without risk or fees.
State-Sponsored Retirement Savings Plans
The DOL announcement gave the green light to several state models, including Automatic IRAs, marketplace models, and Multiple Employer Plans. About two dozen states are considering these plans and, so far, Illinois and Oregon have passed “Secure Choice” plans based on the Automatic IRA, while Washington State has passed a marketplace plan.
DOL’s proposed Automatic IRA rules (open for a 60 day comment period) would let states administer automatic enrollment payroll deduction IRAs provided that the plans meet certain conditions for selecting or managing the investments and consumer protections. States would also have to require businesses to offer such a plan if they don’t already offer their employees a pension or other retirement savings plan. Companies that are not required to offer an Automatic IRA or other plan, but decide to join the state plan voluntarily could still be subject to ERISA. The Retirement Security Project at the Brookings Institution first designed the Automatic IRA, which was proposed by the Administration before being adopted by some states.
In a separate interpretation, DOL allowed states to offer marketplace plans without being subject to the Employee Retirement Income Security Act (ERISA). These plans are essentially websites where small businesses may select pre-screened plans that meet certain fee or other criteria. Under the DOL guidance, these marketplaces may include ERISA plans, but states cannot require employers to offer them. However, if states sponsor a marketplace model, they could also require employers without other plans to offer Automatic IRAs.
Finally, DOL’s rules let states administer Multiple Employer Plans (MEPs), where individual employers all use the same ERISA-covered model plan. MEPs are usually simplified 401(k)-type plans. Because the state would be acting on behalf of participating employers, it could assume some functions that would otherwise be the responsibility of the employer. These include handling ERISA compliance, selecting investments, and managing the plan.
The Retirement Security Project has issued a paper and held an event discussing ways states could create small business retirement savings plans. The paper is available here and the event is available here.
Together, the two initiatives—the new MyRA and the state-sponsored plans– could greatly increase the number of American workers who’ll be able to supplement their Social Security benefits with personal savings.