Monday, March 2, 2015

Obama's Retirement Legacy: Government IRAs & Higher Fiduciary Standards

  • Last week was 'America Saves' week.
  • In its honor, the Treasury Department discussed the Administration's plans to make retirement plans and trusted financial advice available to anyone with a job.
  • In addition to rolling out myRA, a government backed retirement fund, Obama has also asked the Department of Labor to make a few changes.
It may seem an ironic thing to celebrate given the current rate environment, but last week was America Saves Week and The Treasury Department honored the week by announcing the roll out of the myRA program. President Obama also challenged the Labor Department to improve fiduciary standards for retirement products.

It was a little over a year ago that President Obama first announced the introduction of government-backed retirement accounts as a savings initiative. Referred to as a 'myRA', these government-backed retirement accounts earn interest at the same rate as investments in the government securities fund for federal employees. Managed by the Thrift Savings Plan (G Fund), the fund does not have a ticker because it is a trust regulated by the Comptroller of the Currency, not by the SEC.

These savings plans are specifically targeted at employees that don't have a pension or 401k option at their job -- the only requirements being a job and direct deposit. Like a Roth Individual Retirement Account, investors can invest dollars and withdraw earnings tax-free in retirement. You can also withdraw funds at any time without penalty, up to $15,000 per person. Once the account reaches $15,000 it's rolled over into a private sector IRA account. Unlike the Roth, however, funds will be invested solely in government bonds.

From a return perspective, the situation is slightly better than you may think. The chart below provides a 10-year summary of the 'G Fund' compared to other Funds managed by the government's Thrift Savings Plan.

(click to enlarge)
Source: Thrift Savings Plan

This G-fund has had an average annual return of 3% over the last ten years and an annual return of 2.31% in 2014, which while low is much better than the average annual savings rate.

President Obama also announced that he will be advising the Department of Labor to "update its rules relating to retirement advice". In a speech made last Monday Obama said, "If your business model rests on taking advantage of bilking hard-working Americans out of their retirement money, then you shouldn't be in business." This is a welcomed discussion as the number of seniors targeted for investment fraud grows due to new Reg D requirements which lift the 80 year ban on general advertising for private placements.

What the new rules will mean exactly is hard to say -- we won't know until we actually see them, but Obama's remarks clearly call for higher fiduciary standards on retirement products. The rule-making process will begin by soliciting "extensive public feedback" and you can stay informed on the process as it develops at TheGAFI.com.

To read the original statement as made by J. Mark Iwry, the Senior Adviser to the Secretary of the Treasury for Retirement and Health Policy, and the Deputy Assistant Secretary for Tax Policy, click here.

To learn more about myRA you can email myra@treasury.gov or call customer support at 855-406-myRA.