A joke, a good start or a breakthrough?
President Barack Obamas announcement of the new MyRA retirement plan for low- to middle-income Americans in his State of the Union address drew reactions ranging from hopeful praise to scorn from advisers who say many big questions remain to be answered.
Starting with how to pronounce it.
Is it MyRIA or MyIRA?, asks Frank Paré, who works with many middle-class clients in Oakland, Calif. Oh, its MyRA. Thats a tongue twister.
Its such an awkward phrase, even the president stumbled when he first stated it, says Ric Edelman, founder of the large RIA Edelman Financial, referring to Obamas slight mispronunciation of the term in the address.
The very fact that the name is similar to another retirement planning program the IRA may indicate that it is, indeed, redundant, and may ultimately fail to gain adoption for that and a host of other reasons, Edelman says he fears.
You can already open one of these accounts at a bank, says Edelman, whose online planning service targets middle class clients.
The MyRA program is mainly aimed at Americans making less than $191,000 a year who do not have access to 401(k) plans. The government plan would automatically draw specified sums of money out of workers paychecks, an integral feature of 401(k) plans. The value of MyRA accounts would compound at low rates, probably slightly more than 3% at most or, at the low end, a bit more than 1%.
But, they would never lose their value thanks to their government backing. And account holders could withdraw their funds at any time, without incurring a tax penalty, a feature unavailable in both 401(k) and IRA plans. Once the accounts reach $15,000 in value, they must be rolled into IRAs.
The program will be of zero use to planners whose clients by virtue of the fact that they can afford to hire an advisor in the first place wont need it, Edelman thinks.
So, why do we need yet another program creating yet another level of complexity to the system? Edelman asks. Im looking to see whether this is truly unique or is it merely the 26th mousetrap that the government is creating. If it would cause millions of low-income Americans to save for retirement who are not currently doing so, and I hope it does, the goal is laudable, but I dont think it will succeed.
Sheryl Garrett, head of the influential Garrett Network of financial planners, shares some of these concerns, but also feels that it could with the emphasis on the conditional mark the beginning of a breakthrough. Garrett planners serve about 25,000 clients nationwide, most of whom are middle class.
I think its going to cause a lot of people to actually get started saving, Garrett says, thanks to the fact that MyRA allows people to save as little as $5 or $25 on a regular basis, without necessarily noticing the money is gone.
A common reason why young people have not started to save is that they fear they will lose money, according to Garrett.
When people are first starting to save the last thing [they] want to have happen is a bad experience. You invest and lose a quarter or half of your money, or even if they lose a little bit they think, Forget that, Garrett says.
In recent years, Garrett says she had engaged in an ongoing dialogue with a Treasury Department official about how an automatic savings program could be implemented to help lower-income Americans prepare for their retirement. Perhaps the MyRA program could eventually grow to serve this purpose, Garrett thinks.
But she says she still has questions and concerns.
My big question is, Why does the government have to design an investment program that the industry could have done?
The fact that the industry could not have guaranteed the accounts is the only missing link, she says.
I have mixed emotions that there wont be a tax penalty if [investors] withdraw funds, Garrett adds. Tax penalties keep us from raping and pillaging our savings accounts, but, on the other hand, those penalties also keep us from saving in the first place.
A potential impediment to the programs success could be whether or not low-income Americans can even afford to make very low contributions into MyRA accounts, Edelman, Garrett and Paré say.
I think the intent is good, but I think, in practical terms it might be a hard sell for the average person who is trying to make ends meet, according to Paré. Quite frankly the idea of not having as much cash flow right now is not very appealing especially if you have people whose income, adjusted for inflation, is going down or remaining flat.
Paré points out that even the striking successes of the 401(k) plan among high-earners has not filtered down to rank-and-file workers.
And if MyRA is made mandatory even with the caveat that workers can withdraw funds without penalty the government risks a backlash, he thinks.
Edelman agrees. When you make enrollment automatic, the workers immediately borrow and if you dont allow them to borrow, its called confiscation, he says.
And the rate of return [account holders] are being offered isnt sufficient to create retirement wealth, Edelman adds. Why doesnt [Obama] just increase the Social Security program? Instead hes creating another government bureaucracy and a new set of tax rules. The laughable part of the program is that he wants to help low-income Americans, but the upper income limit is households making $191,000. Its ridiculous. Why not create a program for low-income Americans?
That said, Paré adds, the new program is moving the conversation forward about Americas lapses in its retirement preparedness.
The message is clear that Social Security is not going to be enough, he says. So, whats going to be the alternative? How are we going to address this tsunami of individuals retiring and not being prepared. I think this is what might be motivating this discussion right now.
Marsh writes for Financial Planning, a SourceMedia publication.
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