The Treasury considers a 401(k)-style plan for people who don’t have one at work
Many experts bemoan the fact that half of working Americans—call it 75 million—don’t have an employer-sponsored retirement plan. And those workers, many of whom are not saving for retirement using an IRA or other type of retirement savings account, are at risk of not being able to sustain their pre-retirement standard of living.
For these workers, lawmakers, policy experts and others have long suggested that automatic IRAs would help solve that problem. But proposed laws to create 401(k)-like accounts for workers who don’t have access to employer-provided qualified pension plans have largely died on the vine. For instance, Rep. Richard Neal, D-Mass., introduced yet another Automatic IRA Act in May of this year, but experts give it little chance of becoming law any time soon. The proposed law would require employers to automatically enroll employees in an IRA unless the employee opts out.
Enter R-Bonds, which so happens to be the default investment in Neal’s automatic IRA proposal. Yes, the Treasury Department, which first began working on the program in 2009, will roll out in January retirement or R-Bonds to encourage savings by Americans not enrolled in a company-sponsored pension, according to a recent Financial Advisor magazine report.
Speaking at the Women’s Institute for a Secure Retirement annual symposium in Washington, D.C. last month, Mark Iwry, a deputy assistant secretary for retirement and health policy at the Treasury Department, said the R-Bonds “would have the tax characteristics of an IRA and be eligible to be rolled over into an IRA once the savings reach a now-unspecified threshold,” according to a recent report in Financial Advisor magazine.
A proposal under consideration at the Treasury Department could create a special kind of savings bond for people who don’t have retirement plans at work.
According to the magazine, Iwry said that “the R-Bonds would be aimed at workers at companies that don’t sponsor retirement programs of any kind, part-time employees not eligible for plans their companies sponsor, and the self-employed or not employed.” With the R-Bonds, an employee could have an automatic payroll deduction to make contributions and the bonds would not be designed to compete with company savings plans. And the best part of all: Iwry said the R-Bond program would not require congressional authorization to begin. Read also Administration explores ‘R bond’ as option for retirement accounts (registration required).
Of course, this plan is by no means a done deal. “Treasury continues to study options to encourage Americans to increase their retirement savings,” a Treasury official says. “No decisions have been made about new policies or programs.”
Still, it’s worth asking: What do experts have to say about R-Bonds? And should you consider using them if and when the Treasury Department rolls them out?
A promising idea
In the main, experts are fond of R-Bonds. “I think this is a pretty good idea,” said Anna Rappaport, the president of a Chicago-based retirement consulting practice.
The R-Bond program is for “new savers with the hope that low income [workers] in particular and those without any way to save at the workplace will take advantage it,” said M. Cindy Hounsell, the president of the Women’s Institute for a Secure Retirement, a nonprofit organization based in Washington, D.C.
And Judy Miller, the executive director of American Society of Pension Professionals and Actuaries (ASPPA), a national organization for career retirement-plan professionals based in Washington, D.C., said the following: “I don’t see this expanding the number of people who have retirement savings, but I do see it as a step toward something like the automatic IRA proposal.”
According to Hounsell, the new R-Bonds–like other government-issued savings bonds–wouldn’t pay very much interest, but they would, at least, be guaranteed by Uncle Sam. Details, however, including whether they will be called “R” or retirement bonds, are still in flux. For one, some at the Treasury Department, including Iwry, want the R-Bonds to be used for long-term savings as they would be in an automatic IRA, while some want a workplace starter savings account but not a retirement account.
In its current construct, Hounsell and others said the R-Bonds might work a bit like the Treasury Department’s I-Bond program, a program Iwry gets credit for launching during the Clinton administration.
I-Bonds are a low-risk, liquid, inflation-adjusted savings product. The bonds have an annual interest rate, currently 1.38%, that reflects the combined effects of a fixed rate and a semiannual inflation rate. At present, you may purchase I-Bonds via TreasuryDirect or with your federal tax refund. Click here to visit the I-Bond website.
Another possible advantage with the R-Bond program: “With R-Bonds there would be less chance of ‘lost participants,’ since presumably the Treasury knows where you are at least once a year when you file a tax return,” said Rappaport.
Creating R-Bonds would also address one of the steps that must be taken for automatic IRAs to become a reality, said Miller. “Having this would [mean] that the default investment is in place,” she said.
R-Bond program faces hurdles
But what might be good for savers who don’t have access to an employer-sponsored retirement might not be so good for providers of IRAs in the financial-services industry. Hounsell, for one, thinks the financial-services community might push back against the idea.
According to Hounsell, savers who invest in R-Bonds would probably have their accounts rolled into a traditional IRA at a traditional financial-service firms once it has $10,000 in it. And small accounts of that size are not so profitable to financial firms. “They have not wanted the smaller accounts,” Hounsell said.
Others agreed. “Financial-service companies probably are not enthusiastic about very small accounts, and the expenses might be a problem,” said Rappaport.
Another expert, meanwhile, raises the possibility that R-Bonds might not be a wise investment for those saving for retirement. “My reaction, not knowing the details, is that they would encourage too much of a conservative and narrow ‘portfolio’ versus, say, just an IRA in ETFs or whatever,” said Steve Cooperstein, an independent actuary and the owner of Steve Cooperstein & Affiliates, based in Pacific Grove, Calif.
There are other questions to be answered about R-Bonds, too.
For instance, Rappaport wants to know what incentive there is for workers to be in the program. “The idea would be much more likely to be successful if linked to some other incentive and I do not know if there is anything on the horizon with regard to this,” she said.
Another question, Rappaport said, is what the rate of return would be on R-Bonds, and what, if any, expense charge they would carry.
Noel Abkemeier, a principal and consulting actuary with Milliman, an independent actuarial and consulting firm based in Seattle, had a laundry list of questions and suggestions. Among them:
- What would R-Bonds provide that couldn’t already be done with an IRA? If this is taxed the same way as a traditional IRA, does it limit deductibility of the contribution inversely to income, and with the same limits? Or is it possible to have a Roth IRA version of the bonds?
- What is the advantage of qualifying for rollover? That seems to fit somewhere between no-advantage and no-big-deal.
- Where are the bonds held? Are they in an electronic notional account at the Treasury Department? Are they in your desk drawer at home? Are they at a brokerage account? If at the Treasury Department, there is the ultimate in portability, although that would not mean much.
- If the bonds could be purchased with the filing of your tax return, it might add a little convenience to the transaction.
- Are the R-Bonds inflation adjusted? Probably not, but that could be a potential advantage, if offered.
- Will contributions be limited so it doesn’t benefit the wealthy disproportionately, as usually happens? This is an issue of both tax brackets and quantity of purchases.
- What maturity will these have? Will yields vary depending upon maturity chosen?
- Are there any reinvestment guarantees?
- Will the bonds mature for a lump-sum payout? Or will they have a coupon payout for a fixed income at some point?
- It would be better if they offered “lifetime income bonds,” which effectively would be deferred income annuities. They could have a cash-refund design so the purchasers would be trading lost interest for a lifetime income guarantee, while there was no fear of losing principal. This would send a strong message on priorities by merging the accumulation and decumulation challenges of retirement planning.
- What will be the yield on the bonds? Will these have low Treasury yields, which is not the best investment for a complete retirement portfolio? Or will it be higher, which means that taxpayers will be funding government debt at a higher rate than is justified? How would the yield compare with a corporate bond no-load mutual fund?
All good questions, for which good answers might come sometime soon. Or not. After all, we are talking Washington, D.C. here.