Holding Out For a Better Retirement Plan

Details of the president’s new retirement plan emerged today, and it’s nothing to get excited about. On the bright side, it’s refreshing to see a focus on investment risk, since many 401(k) participants invest too aggressively based on the mistaken belief that cumulative returns average out over time, while risk-averse people may be put off from saving altogether.

However, cautious savers already have convenient access to low- or no-risk investment options, either through existing retirement accounts or by purchasing Treasuries through automatic payroll deduction. What the myRA plan does is offer a modest tax break for investing in a Treasury bond fund similar to one available to federal workers. The tax benefit is modest because it is based on taxes that would otherwise be paid on investment earnings, which would likely be low.

MyRA accounts would be structured like Roth IRAs, with taxes paid up front. Another selling point of the president’s plan is that participants would be able to change their minds and withdraw their money without paying a penalty, encouraging participation by risk-averse low-income workers. However, this would also likely lead to significant pre-retirement leakage. Finally, participants would earn slightly higher investment returns than they would by investing in short-term Treasury bills without being locked in to a longer-term investment.

That’s the good news. The bad news is that once accounts reach a low $15,000 threshold, they would have to be rolled over to an IRA. Though some IRAs provide reasonable investment options at a reasonable cost, most do not. The president’s plan may serve to funnel savings into these accounts without really addressing the failures of the current system.

Though the president’s plan may seem harmless, it distracts from real reform efforts, including a much better plan being introduced tomorrow by Senator Tom Harkin of Iowa. Though the details are not yet public, Harkin’s goal in proposing USA Retirement Funds is to take advantage of risk pooling, economies of scale and professional investment management to provide retirees with secure lifetime incomes without requiring employers to take on long-term liabilities. This, in addition to Senator Harkin’s earlier proposal to expand Social Security, is a serious attempt to address our retirement income crisis.