Did Obama speech slam the 401(k) market?
By Paula Aven Gladych
Retirement industry professionals are happy President Barack Obama gave a nod to retirement during his State of the Union address on Tuesday night, but are upset that he slammed the current 401(k) savings system as not beneficial to the middle class.
“He took jabs at how the 401(k) industry benefits the rich disproportionately to the middle class,” said Chad Parks, president of The Online 401(k). “I don’t think that’s the case. They have rules. They are purposely designed to not do that.”
He added that if employers put in a safe harbor clause so they can receive a benefit match, their employees also benefit from the match.
Someone who earns $500,000 a year would only be able to defer 3.5 percent of their earnings into a 401(k) because no matter how much a person earns, they are only allowed to defer $17,500 a year into a tax-deferred account. Someone making only $50,000 a year could defer 35 percent, but most are unable to do so.
“I see that as a veiled reminder that tax reform is something they still want to do. The 401(k) industry is still a large expense to Treasury and they want to limit the highly compensated from saving on a tax deferred basis,” Parks said. “They haven’t given up.”
He believes that by meddling with the 401(k) system as it stands it would be shooting everyone in the foot, particularly middle class Americans.
President Obama said in his speech that he wants to do more to help Americans save for retirement.
“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,” he said.
He said he would direct the Treasury department to create a new way for working Americans to save without the risk of losing what they put in. The MyRA is a rebranded proposal that has been around for years called the R-Bond. The R-Bond is essentially a Treasury bond that allows anyone to invest in their retirement, but when the money in a person’s R-Bond reaches a certain threshold, it must be rolled over into a traditional IRA. “I like the branding, but the reality is the administration is still misguided,” Parks said. The Obama administration has said that there are no providers out there who will work with small businesses or small accounts, but that’s exactly what The Online 401(k)’s market is. There are many options out there for small businesses to offer retirement plans to their employees.
The MyRA will pay the same amount of interest as is offered on the Federal Thrift Savings plan. In 2012, that amount was 1.5 percent, but it ranged as high as 3.6 percent between 2003 and 2012. Employers would facilitate the deferral through payroll but there would be no administrative fees attached to the program.
Employees can contribute as little as $5 at a time to their account but once their balance reaches $15,000 or they've had the account for 30 years, it will be automatically rolled into a Roth IRA. When the money from the accounts is paid out, participants will get what little interest their account has accrued over time. The bonds purchased within the MyRA accounts are backed by the U.S. government so participants will never lose their principal.
The MyRA idea, while welcome, is a bit too complicated, Parks said. For example, how will accounts be converted into BenefitsPro.com