The U.S. Treasury Department has unveiled a solution it says will allow small business owners to provide retirement plans for their employees and themselves.
The new myRA, My Retirement Account, was prompted by the U.S. government’s concern for its retiring citizens. Policy makers have come to the realization that the majority of Americans will unfortunately face a bleak retirement.
As President Barack Obama said when outlining the plan, “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.”
Current statistics show that close to 40 percent of workers don’t have access to an employer-sponsored retirement plan. Without readily available options to prepare for retirement, individuals and small business owners are left with either Social Security benefits that fall short of life’s expenses or no income at all. The life of U.S. retirees is filled with uncertainties, and in most cases results in remaining in the work force past the retirement age.
According to the SBA (US Small Business Administration) one of the reasons small organizations don’t offer retirement plans to their employees is the cost associated with setting up and running a retirement plan. And employees that don’t participate in retirement plans when it is offered cite the requirements and contribution limits as reasons for not participating.
In the past, company sponsored retirement plans were limited to larger companies that had both the administrative capabilities and the employee count to warrant their establishment.
Small businesses fell into a bracket where the administrative costs associated with a company-sponsored retirement plan deterred them from providing their employees with this key form of support.
myRA Benefits to Small Business Owners
Simplicity is at the foundation of the new myRA. Small businesses are able to establish a myRA account for each employee with no associated costs and administration requirements. The Treasury Department assumes all costs associated with set-up as well as ongoing maintenance of the account.
The only requirements for business owners will be to set-up a recurring automatic withdrawal and deposit. Amounts are managed according to the employees’ allotted contributions into the myRA accounts.
Barbara Weltman, President of Big Ideas for Small Business, Inc., explained in an interview with Small Business Trends how the tax benefit of the new plans is that they do not entail any cash outlay by the employer. This removes the complexities associated with using company funds to provide a retirement plan, Weltman added.
Another major deterrent in the past was that businesses were expected to match the retirement contributions of their employees. MyRA eliminates the need for any such financial contributions. So the cost-to-benefit analysis that businesses were once forced to undergo to determine whether they could even afford a retirement plan are no longer necessary.
The decision making process with the myRA does not require any input from small businesses owners. Employers are not required to choose or advise their employees on the investment options, investment amounts or eligibility.
Most employees are eligible for the myRA. The income qualifications are less than $131,000 per year for single individuals and $193,000 for married couples. The majority of small business employees will fall into that bracket and with only one investment option available, management couldn’t be simpler.
In addition to zero costs, the U.S. Government will handle all associated administrative and communication requirements. All myRA materials designed to inform and guide employees are created by the Treasury Department and supplied to business owners.
Without a financial or administrative burden on the company’s operations, small businesses are likely to see the myRA as an advantage. Being able to provide their employees with a retirement plan, normally associated with larger companies, will give them an additional incentive in reference to employee loyalty.
Although the myRA is essentially designed for any sized business, the dynamics of its regulations make it a perfect fit for small businesses, especially those with 100 employees or less.
myRA Benefits to Employees
Again simplicity is at the core of the myRA plan, and the ease of setup and maintenance applies to workers as well. Employees are able to quickly establish their retirement account without any unnecessary hassles.
The employee is in total control of the investment amount to set-up the account as well as the recurring contributions. The myRA can be established with as little as $25 and the recurring deposits can be adjusted to fit any budget with installments as low as $5 per pay.
Traditional retirement accounts required employees as well as their employers to discuss the options, benefits and risks of the various investment products. On the employees’ side, HR staff was required to explain options in investments such as mutual funds and stocks. Once decisions were made, further administration was required to manage accounts and make any necessary changes, all while keeping the employee informed.
The amount of paper work as well as man hours involved in managing retirement plans put a strain on businesses. Larger companies with dedicated teams were able to leverage these resources, but small businesses were not.
With no investment decisions or program types to choose from, employers and their employees are relieved of having to understand the ins and outs of their portfolios’ performance.
In reference to portfolio performance, safety is another main benefit of myRA. The U.S. Treasury backed fund is virtually immune to losses. Account funds are invested into U.S. debt, making it one of the most secure investment products available.
The myRA also provides employees with tax credits in the form of reductions during their yearly filings. Income limits are restricted to $61,000 for employees that are married, $47,500 for those that are heads of their household and $30,500 for singles. The additional benefit of tax relief makes the myRA a viable supplement towards retirement planning.
In traditional retirement plans, employees were limited to the amount of funds that they were allowed to withdraw. Often times, removing funds from the account came with penalties. The restrictive limits and associated consequences of traditional retirement plans deterred employees from investing to their full potential.
The myRA plan allows employees to withdrawal their principal deposits without any fees or penalties. Having the flexibility of knowing they can withdrawal funds for emergencies gives employees the confidence to continue investing.
The lack of consequences, however, does not apply to the interest earned on the account. Interest can only be withdrawn without penalty after the investor is 59 ½ years old.
My Retirement Account is similar to the more traditional ROTH IRA in terms of taxation. Accumulated and distributed funds are tax-free as long as the funds are used for retirement. As is the case with most investments — time works in favor of the saver. Again like the standard ROTH, the myRA is accumulated with after tax dollars: meaning, that funds are taxed before they are deposited into the account.
The flexibility of the myRA allows it to travel with the employee. As opposed to employer backed plans, the myRA seamlessly moves with the worker during any job changes. Since the main targets of the myRA are temporary and seasonal workers, this flexibility will allow them to maintain a single account across various jobs.
The employee benefits of the myRA greatly outweigh the drawbacks and the pilot testing that has taken place thus far shows positive signs. The Treasury Department has noted that both employers and their employees are providing positive feedback. Employers are expressing that myRA establishment has not strained their resources in any way and employees appreciate this newfound avenue that makes it easier for them to save.
The myRA Process for Employees
The process for establishing a myRA is straightforward. Employees are required to fill out a direct deposit authorization form and submit it to their employer. Once they have decided on the recurring amount to be invested, it will be deducted from every paycheck and deposited into their myRA.
Employees can also choose to link their checking or savings account to their myRA for recurring contributions.
The process for establishing a myRA is becoming more convenient as the investment option continues to evolve. Required documentation is a Social Security Number or ITIN as well as an official ID (drivers license, state ID, military ID or U.S. Passport).
The Drawbacks of the New myRA
Along with the many benefits associated with establishing a myRA, there are some drawbacks.
The safety of a Government backed investment inevitably comes with limited returns. The return on investment will fluctuate with interest rate variations; with a range of 1.5 to 5 percent, savers can expect an average of sub 3 percent returns.
The limiting aspects of the myRA extend to contributions as well as total account caps. Contributions are limited to $5,000 per individual per year. That cap is raised to $6,500 for those over 50 that are nearing retirement. The overall account is limited to an accumulation of $15,000 or a period of 30 years; whichever comes first. Any funds exceeding the cap will have to be transferred to a Non-Government retirement account.
For Whom is the myRA Designed?
With no downside to its establishment, small businesses are a key beneficiary in the Treasury Departments incentive. Employers are now able to offer a “managed” retirement plan for their employees and play a role in their departure and after work life.
For individuals, the myRA is geared towards those that may have no other options for saving towards retirement. The Treasury Department has described the myRA as “a starter retirement account.”
Part-time workers, seasonal staff as well as certain contractual employees are often times left with no investment vehicle to save for their retirement. In those instances, the myRA provides a safe, dependable, although limited form of investing.
For now, the winners are small businesses and employees that may have otherwise not invested at all in their retirement.