Conventional wisdom and data reveal that accumulating assets and building wealth over the life course—sometimes called the “cradle-to-grave” approach—yields the most desirable financial outcomes. Yet for many Americans, having enough income to set aside for key stages of life, such as homeownership, higher education and retirement, poses a significant challenge, especially when navigating economic downtowns as many are doing today. Many individuals, especially those from low- and moderate-income (LMI) households, must necessarily make reluctant but deliberate choices to meet short-term needs at the expense of long-term goals.
The unfortunate results of these choices are evident in the data. According to the Federal Reserve Board’s recent publication, Report on the Economic Well-Being of U.S. Households in 2013, 31 percent of respondents in a national study reported having no retirement savings or pension, and more than half (54 percent) of those with incomes under $25,000 reported the same. Compounding this lack of preparedness is the reality that many employees (35 percent) in the U.S. who work for private companies also lack access to an employer-sponsored retirement plan, according to the U.S. Bureau of Labor Statistics. What’s more, access isn’t provided evenly across all wage-earners. While 85 percent of those in the highest wage-earning quartile had access to retirement plans, only 38 percent of those in the lowest quartile had access in 2014.
In his 2014 State of the Union address, President Obama announced that the Treasury Department was developing a new way for workers to start saving for the future. Expected to begin rolling out later this year, the myRA (“My Retirement Account”) program promises to be a simple, safe and affordable way to start saving for retirement for those who don’t currently have access to an employer-based program. Early descriptions of account features indicate that the program will be particularly attractive to LMI employees and to those for whom long-term saving is especially challenging.
Expected key features of the myRA program include:
The myRA program will follow Roth IRA rules and offer the same tax advantages as those accounts. Like Roth IRAs, the employee contribution portion of the invested funds can be withdrawn tax-free at any time, with no penalties.
“The flexibility of myRAs should be very attractive to low-income families,” said Ray Boshara, senior adviser and director of the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis. “These starter accounts provide a low-cost, safe way for individuals to start saving for retirement while retaining the ability to use their funds for emergency savings or other needs while they do so.”
According to some industry analysts, the flexible features of the myRA program could have a notable impact on the retirement readiness of a portion of American employees by filling a gap in financial products available to build long-term retirement savings. Many believe that the easy on-ramp to long-term savings that is provided through the program, coupled with the flexibility offered for liquid assets, are two important features toward spurring adoption and financial stability among a specific segment of eligible employees.
Designed for savers who do not have access to an employer-sponsored retirement savings plan, the myRA program will not only be available to full-time employees, but also to part-time and contract workers. Eligible employees will have an individual annual income of less than $129,000, or a combined annual income of less than $191,000 for a couple.
Initially, participating employers will make myRA information available to their employees. Once the accounts are available, employees will be able to enroll in the program via direct deposit, with no minimum contribution to start. An employee can then elect to have a portion of each paycheck—the amount determined by the employee— automatically deposited into a myRA account. Employees who change jobs can continue to add savings to an existing myRA account by setting up deposits through any employer that offers payroll direct deposit. Those with multiple jobs will be able to use direct deposit from each paycheck to contribute to a single myRA.
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