Obama Unveils Savings Proposal for Workers Lacking 401(k)
By Mike Dorning and Margaret Collins - Jan 29, 2014 - Bloomberg
President Barack
Obama is offering more Americans the chance to put away money for retirement
through payroll deductions with a plan for new government-sponsored savings
accounts.
The accounts, which Obama announced yesterday in a State of the Union address
that concentrated on expanding economic opportunity, will be aimed at workers
who donft have access to a 401(k) plan, administration officials said.
The gMyRAh plans, similar to individual retirement accounts, will provide ga
new way for working Americans to start their own retirement savings,h Obama
said.
Under the proposal, workers could have part of their pay deducted for deposit
into an account invested in U.S. government bonds that would be treated for tax
purposes as a Roth individual retirement account, with future earnings tax-free.
The accounts would be open to people with annual household income up to $191,000
whose employers choose to participate, according to a White House fact sheet.
Initial investments could be as low as $25 and payroll contributions as low
as $5. The plans, set up through the Treasury Department, would have a maximum
balance of $15,000, after which money would have to be rolled over into a
private-sector Roth IRA, the fact sheet said.
Laurence D. Fink, chief executive officer of BlackRock Inc., the worldfs
largest asset manager, said in a statement yesterday that hefs gtremendously
encouragedh by a proposal he said he hoped would gkick off a much-needed
national conversationh on retirement security.
Existing Authority
The officials, who briefed reporters on condition of anonymity before Obamafs
nationally televised speech, projected that millions of Americans would take
advantage of the savings accounts. Participation would be voluntary and
principal contributions will be guaranteed under the plan.
The president can establish the savings program under existing executive
authority without new legislation, the officials said.
Obama is promoting his State of the Union initiatives over the next two days with
trips outside of Washington. After a stop this morning in Lanham, Maryland, to highlight his planned order to give future
federal contract workers a higher minimum wage, Obama plans to give more details
on his retirement plan later today during a visit to Pittsburgh, Pennsylvania.
eRetirement Twistf
gThis isnft earth-shattering stuff,h said Brian Graff, the chief executive
officer of the American Society of Pension Professionals & Actuaries. gBut
it is a step in the right direction to get more people saving for retirement,
which I would think is a bipartisan issue.h
gI donft expect this to get a lot of pushback,h said Graff, who discussed the
proposal in advance with Treasury officials. He said it draws on an existing
program that permits workers to purchase U.S. savings bonds through payroll
deductions and adds ga retirement twist.h
The proposal resembles an earlier Obama administration plan that would have
required employers to offer an automatic IRA option to employees. That plan,
which was included in Obamafs 2014 budget, would have cost the government an
estimated $17.6 billion in foregone revenue over 10 years.
About 68 percent of U.S. workers had access to retirement benefits as of
March 2013, with 54 percent participating, according to the Bureau
of Labor Statistics.
Vanguard, Fidelity
The Investment Company Institute, a Washington-based trade group for the
mutual-fund industry, welcomed the proposal as a complement to gexisting vibrant
and competitive private-sector retirement offerings,h according to a statement.
Linda
Wolohan, a spokeswoman for Vanguard Group Inc., said in an e-mail yesterday
that galthough we donft have the details yet, Vanguard is generally supportive
of expanding savings opportunities for those not covered by a workplace
retirement plan.h
Wolohan declined to comment further before hearing the details of Obamafs
proposal. Vanguard was the second-largest manager of 401(k)-type assets in 2012
behind Fidelity Investments, according to researcher Cerulli Associates.
Fidelity, which is also the largest provider of IRAs, declined to comment
before hearing the speech, according to an e-mail from spokeswoman Eileen
OfConnor.
JPMorgan
Chase & Co. (JPM), which manages retirement assets and administers
plans, declined to comment before seeing more details, Gregory Roth, a bank
spokesman, said in an e-mail.
One of the biggest challenges for the retirement system is that many workers
donft have access to a pension or 401(k) plan through their employer, said Lisa
Mensah, executive director of the initiative on financial security at the Aspen
Institute.
Small Businesses
gWe have to get people in,h Mensah said. gYou do need an automated way for
people to get into the savings system.h
Small-business groups in the past have opposed such proposals because they
say that setting up the required payroll deduction would be a cost for them.
Molly Brogan Day, a spokeswoman for the National Small Business Association
in Washington, said that while her group gsupports making
retirement savings easier, the auto-IRA idea is one wefve raised skepticism over
in the past because it put the administrative and financial onus squarely on
small firms.h
U.S. savings bonds designed for retirement accounts have been proposed in the
past and termed R-bonds, said Don Fuerst, an actuary and senior pension fellow
at the American Academy of Actuaries.
eSmall Amountf
The securities are seen as a way to allow low-income workers to save for
retirement, Fuerst said. They usually canft contribute much at the start, making
their balances expensive to administer and vulnerable to investment-management
costs.
gIf youfre only putting a small amount into the plan the fees could eat up
your investment income,h said Fuerst, whofs based in Washington. gThis gets
around that.h
With savings bonds, he said, the U.S. government can issue the investments
and cover the costs of keeping track of them.
The accounts arenft as attractive as a typical employer-sponsored 401(k)
because there is no employer match and only one investment option, Graff said.
Even so, he said, it may significantly boost retirement savings for middle-
and low-income workers who donft have access to a 401(k) account, Graff said.
Middle- and moderate-income workers in particular are much more likely to set
aside money for retirement when they can have it directly deducted from their
pay, Graff said.
Among workers earning between $30,000 and $50,000 a year, 72 percent of those
covered by an employer-sponsored payroll deduction retirement plan such as a
401(k) participate, while only 5 percent of those without such a plan set aside
money through an IRA, according to a 2010 analysis of 2008 data by the Employee
Benefit Research Institute.