As many of you have no doubt heard, President Obama introduced a new retirement savings vehicle, known as a myRA, in his State of the Union address. At first blush, the program appears aimed exclusively at employees with no company-sponsored retirement plan and therefore of little interest to employers with sophisticated retirement programs already in place. However, deciding not to explore myRAs based on that first impression could be a mistake.
Treasury’s just released myRA fact sheet flatly states that employees participating in an employer-sponsored retirement plan are still eligible to make myRA contributions, as long as their annual incomes are less than $129,000 for individuals and $191,000 for couples. It appears that all employers—even those that already sponsor a retirement plan—will be eligible to participate in the myRA program and to sign up their employees for automatic payroll deduction contributions. In addition, because myRAs are structured as Roth IRAs, employers might be able to offer myRA contributions as an after-tax elective contribution option under their 401(k) and 403(b) plans, although Treasury has yet to confirm that and data links between Treasury and plan recordkeepers might be difficult and expensive to establish.
Whether employers participate in the myRA program inside or outside their 401(k) and 403(b) plans, the hidden gem in the program is the Treasury security employees will be eligible to buy. It is a nonmarketable Treasury security that until now has been available only to federal workers through the federal Thrift Savings Plan G Fund. The security pays interest at a variable rate equal to the weighted average yield of all outstanding Treasury notes and bonds with 4 or more years to maturity. This means it carries no principal risk, offers a blended mid- and long-term government bond yield, and would be a safer and possibly higher yielding alternative to a money market, stable value, or bond fund, all while being backed by the full faith and credit of the United States government.
Because of their unique characteristics, myRA Treasury securities could form a valuable part of the fixed-income component of employees’ retirement savings portfolios. Although myRA account balances are capped at $15,000, even that amount would enhance the fixed-income allocation in most employees’ retirement portfolios, given the low average account balance in the typical 401(k) and 403(b) plan.
So, what’s not to like about this new retirement savings alternative? Our prediction is that, once employees come to understand them, demand might maybe, just possibly, become brisk.