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Here's What Any White House Retirement Plan Needs to Do
Details are sketchy about the new retirement plan that President Obama proposed in the State of the Union Address last night, so it's too early to offer any verdict. What causes concern, though, is that the Obama administration has previously floated retirement schemes that would double down on America's failed experiment with individual private accounts that are the cornerstone of the 401(k). Let's hope the administration now wants to head in a very different direction -- toward a universal system to supplement Social Security that mitigates risks and fees for individuals, and is built on pooled accounts managed by professionals.
The president said many of the right things last night about what's wrong and what needs to be done. Here's what he said:
Today most workers don't have a pension. A Social Security check often isn't enough on its own. And while the stock market has doubled over the last five years, that doesn't help folks who don't have 401(k)s. That's why tomorrow I will direct the Treasury to create a new way for working Americans to start their own retirement savings: MyRA. It's a -- it's a new savings bond that encourages folks to build a nest egg.
MyRA guarantees a decent return with no risk of losing what you put in. And if this Congress wants to help, work with me to fix an upside-down tax code that gives big tax breaks to help the wealthy save, but does little or nothing for middle-class Americans, offer every American access to an automatic IRA on the job, so they can save at work just like everybody in this chamber can.
A White House fact sheet further describes the MyRA this way:
a simple, safe and affordable “starter” retirement savings account available through employers to help millions of Americans save for retirement. This savings account would be offered through a familiar Roth IRA account and, like savings bonds, would be backed by the U.S. government.
The Wall Street Journal writes that the new plan seems "similar to an idea Treasury officials have studied for several years, which would create something called an R-bond, allowing employees to have a certain amount of money deducted from each paycheck and directed toward a specific investment."
We will know more specifics about the administration plan soon, but in the meantime it is easy to say what the features of any new system should be. Senator Tom Harkin laid out four principles to guide such a plan in an important 2012 report, and is set to put out a detailed retirement plan of his own tomorrow. Meanwhile, California has already enacted a new retirement savings program that includes a number of features that should be replicated in any national plan.
Here are the must-haves of any retirement plan put forth by the administration:
Participation should be universal and automatic
It shouldn't be something that you sign up for or have to think about. It needs to just happen. Studies show that many workers don't take advantage of the 401(k) even when their job offers one for various reasons, and this is among the many weaknesses of the 401(k) system. We don't want to replicate that with any new plan. Under the California plan, according to a New America Foundation brief, "All workers at firms of five or more employees will be automatically enrolled in the program, with the option to opt-out. Participants’ default contribution to their accounts will be 3% of each paycheck, though they can adjust this contribution level at any time."
Accounts should be portable
The great thing about Social Security is that you and any employer keep paying into the same system for your future no matter where you go, and there are none of the Byzantine hassles of trying to roll over or move 401(k) savings. The new California accounts are fully portable, too.
Retirement assets should be pooled and professionally managed
Two of the worst features of the 401(k) are that they are built around individual accounts which incur management fees, and individuals must choose how to invest their money -- often doing so poorly. Any new national program should keep all funds in pooled investments managed by professionals. There are hints that the MyRA plan would be run by the Treasury, which would be a good thing.
Returns should be guaranteed
The president also said that "MyRA guarantees a decent return with no risk of losing what you put in." This feature is key, and tracks with the California program: people can't lose money and will get a least some return on what they put in. This overcomes the qualms many Americans have, and for good reason, about putting money into the stock market.
These are just broad principles, but it's imperative that they are reflected in any new administration plan. Any you can bet that Wall Street will do everything it can to push back against many of those principles and promote individual accounts that financial firms manage. But as Demos showed in a 2012 report, the finance industry has been a greedy middleman in the 401(k) system, quietly draining retirement wealth from millions of workers.
We can't let that happen with a new retirement program.
