Last week, President Obama announced a new retirement program - MyRA (My Retirement Account). This program is aimed at low and middle income employees who do not have an employer-sponsored retirement account, like a 401k. On the surface, this programs seems to be a good way to encourage people to save.
What is a MyRA?
According to the US Department of Treasury, the MyRA program will offer a new way for employees who have an annual income of less than $129,000 single/$191,000 for couples to start saving for retirement. These accounts are similar to Roth IRA accounts and will be offered through participating employers. They can be opened with an initial after-tax contribution of $25; and as little as $5 can be contributed each pay period, up to $5,500 per year.
Once the accounts are available later this year, employees of participating employers can sign up for MyRA online then setup an automatic direct deposit through their employer. At this time, the Treasury Department says the program is voluntary for employers and employees and will not be run by employers, but it appears it will add an additional administrative step in the payroll process. There will be no fees associated with the account for employees or employers.
The MyRA funds are invested in government-secured bonds (similar to the Thrift Savings Plan for government employees). Unlike a 401k, it stays with the individual if they leave their job and does not need to be rolled over until the account reaches $15,000 (or after 30 years) - then the individual must roll it over into a traditional retirement account. Since these are basically Roth IRA accounts, contributions can be withdrawn tax free at any time, but earnings cannot be withdrawn without penalty until age 59 ½.
What is the risk/return?
These MyRA accounts are considered low-risk because they are invested in government bonds that are backed by the US Government and principal balances will never decrease in value. However, with an average interest rate of 1-3 percent over the last ten years, government bonds typically do not earn enough interest to keep up with inflation.
Small Business Advise
As mentioned, the program is completely voluntary for both employees and employers - at this time. As with anything with the government, it is subject to change. Unless this becomes mandatory for employers to participate, I would encourage employees to compare the MyRA with a Roth IRA as they offer which offers more investment options than a simple government bond.