In October 2015, the Center for American Progress submitted comments to the U.S. Department of the Treasury in response to its request for public comment on rollovers in its myRA program. The text of the full comment letter is here.
In his 2014 State of the Union address, President Barack Obama announced a new savings program for American workers: my Retirement Account, or myRA. Open to all workers eligible for a Roth Individual Retirement Account, or Roth IRA—generally single filers earning less than $132,000 per year and married couples earning less than $194,000—myRA is a safe starter account for retirement that requires no minimum balance. Funds are invested in a government bond based on the Government Securities Investment Fund, or G Fund, of the Thrift Savings Plan, or TSP, for federal workers. This means savers do not need to worry about losing their savings in a market downturn. There are no fees—unlike other retirement accounts in which fees can erode the value of savings over time. And savers’ own contributions can be withdrawn tax-free if they need to access the funds before retirement, although a tax penalty may apply if interest earned on the account is withdrawn.
Why myRA matters
Less than half of American workers currently have access to a retirement plan at work. Many are woefully unprepared for retirement, with a typical near-retirement household having only $14,500 in a retirement account. And millions of Americans lack even small amounts of savings, with nearly half surveyed by the Federal Reserve reporting that they would be unable to come up with even $400 in an emergency without borrowing or selling something. The myRA program promises to fill these savings gaps.
After a pilot program with select employers, the U.S. Department of the Treasury opened myRA participation to the public on November 4, 2015. Eligible savers can make contributions regularly and automatically with each paycheck; through direct deposit from a bank account at the saver’s convenience; or from a tax refund. Savers are free to move their savings from myRA to another Roth IRA at any time. But when account balances reach $15,000—or when the account holder reaches the Transfer Threshold by participating in the program for 30 years—savers will automatically exit the program for a private-sector option.
The following recommendations would strengthen the myRA program for both participants and program graduates.
Four ways to improve myRA rollovers
- The Department of the Treasury should better coordinate myRA with other savings and tax policies, such as the Saver’s Credit and asset limits. Many savers presently earn too little in order to benefit from the Saver’s Credit or may not even know that they are eligible for it. The Internal Revenue Service, or IRS, could make small changes to tax forms and guidance that would enable tax filers to contribute part of their tax refund to myRA and claim the Saver’s Credit at the same time, immediately rewarding savings and making participating in myRA more attractive. In order to ensure that families benefit from myRA savings as much as possible, the Department of the Treasury should also coordinate with other federal agencies to clarify for savers and advocates the cases in which myRA contributions will count against asset limits. These limits often discourage savings, and exempting myRA contributions from these limits where possible will increase participation. Additionally, as the U.S. Department of Labor finalizes its proposed rule on conflicts of interest in retirement investment advice, the Department of the Treasury should ensure that myRA participants are not subject to deceptive sales pitches disguised as advice recommending that they roll over their funds into high-cost or risky financial products.
- Older myRA participants should be able to keep their savings in myRA even after their balances reach $15,000. Older myRA participants likely have a goal of maintaining their existing savings—not seeking the highest returns possible. And unlike younger workers, they benefit less from the effects of compound interest over time, especially as they begin to withdraw from these accounts. For these reasons, myRA participants reaching the age of 62—the early eligibility age for Social Security—should be able to keep their funds in the program rather than face risky alternatives elsewhere.
- Funds at the Transfer Threshold should automatically roll over into the full Thrift Savings Plan or a similar low-cost public option instead of subjecting participants to high fees. The myRA participants who do not choose to move their funds elsewhere upon reaching a balance of $15,000 should have access to the full TSP, where they will pay a fraction of the fees charged for many other retirement accounts and have access to high-quality investments at a fraction of the cost. By default, participants’ funds should be invested in the lifecycle fund, or L Fund, most appropriate for their age, as this fund automatically adjusts the risk level over time.
- If a public option is not available, myRA accounts at the Transfer Threshold should randomly roll over to qualified investment managers that provide a low-cost target-date fund. The Department of the Treasury should identify Roth IRA providers that offer a default target-date fund with a total expense ratio less than 25 basis points, or 0.25 percent, inclusive of all fees—options that already exist in the marketplace today. Only providers meeting these criteria would be eligible to be included in informational materials to savers reaching the Transfer Threshold and to receive accounts by default. While providers would be able to offer other options as well, advising participants to invest in these other options should be subject to the U.S. Department of Labor’s conflict of interest rule, and fee information should be readily available along the lines of a retirement receipt that clearly outlines costs.
Conclusion
The myRA program has the potential to build financial security for millions of Americans by making saving for retirement and other needs both appealing and accessible. By ensuring that participants are best able to take advantage of savings incentives, such as the Saver’s Credit, and by helping them keep their funds in low-cost appropriate investment options over time, the program can effectively achieve its goals.
Joe Valenti is the Director of Consumer Finance at the Center for American Progress. David Madland is a Senior Fellow at the Center.