In his State of the Union address yesterday, President Obama announced that he will today be directing the Treasury to issue MyRA bonds. This is a savings bond that “guarantees a decent return with no risk of losing what you put in.”
The target market for these bonds is the large proportion of the American workforce not covered by the current employer-based retirement systems, such as the self-employed and those who work for small employers. This coverage gap has been a growing concern in Washington, D.C., especially as fewer and fewer Americans today are comfortable with the idea of having only Social Security to rely on in retirement.
The primary incentive to encourage retirement saving has traditionally been the tax break. But that’s not an effective way to address the coverage gap and, in any case, is not an area where the government currently has much flexibility. So it’s natural to look for other ways to encourage more participation. Nudging—the structuring of choices to encourage a particular outcome—is one; hence the persistence of the auto-IRA idea, which was also highlighted in the President’s address. MyRAs are another.
There’s no question that cost-effective, practical means of saving for retirement are few and far between for a large part of the population. MyRAs aim to fill a gap that has been hard to fill until now. By making tax-effective retirement saving as easy as just buying a government savings bond, the hope is that saving for retirement will become more easily accessible to a new segment of the population.
My colleague Tim Noonan, Managing Director of Capital Market Insights in Russell’s Private Client Services group, points out the sheer scale of the retirement saving challenge: “Solutions by definition are complex and multilateral with incentives to stop doing bad things—such as hustling overpriced or inappropriate products—as well as start good things, like incent saving via tax breaks. The government might as well play a role since they are holding the bag for the safety net.”
The coverage gap is by no means the only area where the retirement system could be improved. As we’ve pointed out before, the existing system works very well in many ways, and is by no means broken, but it’s certainly far from perfect.
Josh Cohen, Russell’s Managing Director for Defined Contribution, points out other key areas of concern: “Even for those that have plans, they are not being maximized by participants relative to their full potential. There’s not enough participation. Not enough savings. Not investing correctly. No guaranteed income. Fees are opaque.
“Plus, plan sponsors are struggling to meet their duties. Small plans don’t have scale, time and expertise. Others don’t see any incentive to go the extra mile and offer anything more than ‘good enough’ plans”.
While government action probably is necessary if the coverage gap is to be addressed, these other issues are ones that lie within the existing system; only if sponsors and investment firms fail to step up would government intervention (which neither group are likely to welcome) be needed. As Josh puts it: “All the tools are there to make workplace savings plans work for the American worker. Plan sponsors should strive for plans that are more than just average.”
So this is a debate which will run and run. Russell is a firm built on a mission of “improving financial security for people”, so you can expect Tim, Josh, me, and others here to be part of the debate.
For a fuller discussion of these issues, see Ezra, Collie and Smith (2009), The Retirement Plan Solution: The Reinvention of Defined Contribution, Hoboken: John Wiley & Sons