Authors, Eleanor Banister, Atlanta, +1 404 572 4930, ebanister@kslaw.com and Ryan Gorman, Atlanta, +1 404 572 4609, rgorman@kslaw.com.
In his State of the Union address on January 28, 2014, President Obama announced the creation of a new retirement savings option. The "my Retirement Account" or "myRA," which will be developed by the U.S. Department of Treasury, is touted as a "starter" savings account. The program will depend on employer payroll deductions. This article answers questions employers may have about the details of the myRA program, which is set to roll out in late 2014.
1. What is a myRA?
MyRA's will be Roth individual retirement accounts ("Roth IRA's") designed for individuals who either do not have access to an employer-sponsored retirement savings plan or desire to supplement an employer-sponsored plan. Participants will make after-tax contributions to a myRA account that is administered by the Treasury Department. Investments in myRA's will be backed by U.S. savings bonds and other Treasury securities, and will never decline in value. MyRA's will earn interest at the same variable rate as the federal employee's Thrift Savings Plan Government Securities Investment Fund.
Only individuals whose annual income is less than $129,000 ($191,000 for couples) will be able to participate in myRA's. The initial minimum contribution through direct deposit will be $25, and employees will be able to contribute as little as $5 per paycheck.
MyRA contributions may be withdrawn tax-free at any time. Earnings on myRA accounts may be withdrawn tax-free after age 59 1/2. Under the rollover procedures to be developed by the Treasury Department, the myRA account balance will be rolled over into a private-sector retirement account when the balance reaches $15,000 or after 30 years, whichever is earlier. Employers should expect rollover procedures to be released by the Treasury Department in late 2014.
2. How does this impact employers?
The myRA program will be funded through payroll deductions only. Once the program is available in late 2014, employees of participating employers may sign up online and coordinate contributions, free of charge, via direct deposit through their employer.
Employers, however, will not be required to offer the myRA option. The Treasury Department has advertised this as a benefit with "little or no cost" to employers, although further guidance is required to clarify whether any fiduciary responsibility could be incurred by employers who offer the program.
3. How will myRA's impact existing retirement plans sponsored by employers?
MyRA will be available to employees to supplement their contributions to employer-sponsored plans. That is, employees will have the option to contribute to both an existing retirement plans and a myRA account, although as discussed below, maximum contribution limits will likely still apply.
4. What are the benefits to employers of utilizing myRA?
Expanded Access to Retirement Savings. The myRA program can help individuals who do not have access to employer-sponsored retirement plans save towards retirement, such as temporary, seasonal or leased employees. It can also benefit employers who do not sponsor retirement plans.
Low Costs. Employers' cost to utilize the myRA program will be limited to the cost of additional payroll deductions. Employers are not involved in the administration of the program.
5. What are the potential risks and unknowns associated with offering myRA to employees?
Application of Roth rules. The myRA will be a Roth IRA, although it is unclear at this point whether all rules that apply to Roth IRAs will also apply to myRA (such as the requirement that earnings on Roth IRA investments may not be withdrawn without penalty until 5 years after the date initial contributions were made to the account). It is unclear whether the myRA will be subject to cumulative contribution limits to Roth IRAs and IRAs.
Lack of differentiating factors from existing retirement savings options. Commentators have suggested that the myRA option does not significantly expand investment options for individuals who cannot contribute to employer-sponsored plans, as those individuals currently are already eligible to contribute to traditional IRAs or Roth IRAs. It is also debatable whether saving as little as $5 per paycheck will result in any significant retirement savings for myRA participants.
Lower investment returns. The investment option is significantly limited for myRAs as compared to other retirement savings options. While guaranteed against loss, the government backed securities may only have a negligible yield against inflation over time, whereas other types of investments may provide better long-term return.
Employee engagement. It is unclear how many employees will actually enroll in myRA if offered. The voluntary nature of contributions to myRA will not be as effective as an automatic enrollment feature in an employer-sponsored plan. Adding in the fact that there will be no employer matching contributions to myRA accounts, it is debatable as to how attractive the myRA program will be.
6. Conclusion
The high profile nature of the announcement of myRA may have piqued the interest of many employees who are interested in expanding options for retirement saving. While this program will not be rolled out until late 2014 (at the earliest), prudent employers should consider whether to add this program to their retirement savings options. As discussed, there are outstanding questions about the efficacy of the program. Nonetheless, it appears this is an important initiative for the Obama administration that will become a reality at some point later this year.
