On Wednesday, President Obama sent out a memorandum directing the Treasury Department to develop a new retirement savings security for working Americans. The development of the new security is to be finalized by the end of this year so that workers can start contributing into the accounts by 2015. The President also directed Treasury to work with employers and have a pilot program in place within 90 days.
In essence, the President realizes that many Americans are concerned about what will be available to them when they retire. Currently, only about half of working Americans have access to 401(k)s or other employer-sponsored retirement accounts. The other half then need to find other means of putting money aside towards their retirement or rely entirely on Social Security. One option out there is an Individual Retirement Account, or IRA.
However, less than 10% of all workers voluntarily contribute into an IRA. However, if a worker is automatically enrolled in a 401(k) plan through work and can have their contributions deducted directly from their paycheck, the participation rate is extremely high. In fact, around 90% of those workers contribute directly into their retirement accounts. Therefore, the President figured that it would be a great idea for more working Americans to have the opportunity to invest into their retirement savings directly from their pay.
The proposal is more or less an IRA that will have the money directly deposited from an employee’s paycheck. It is not requiring employers that do not currently offer sponsored retirement savings accounts to contribute on their end. Merely, that the employer allow the employee to enroll in this savings account and allow for automatic deductions from the employee’s pay. Since participation and contributions into workers’ retirement accounts is much greater when automatic enrollment and payroll deduction is available, this plan should allow more Americans to save a lot more money for their golden years.
On top of that. the President has also directed Treasury to make sure that this new retirement savings security has safeguards built in to protect the contributor. One, the principal amount in the account shall stay protected. Therefore, while it will accrue interest over time due to investments, it won’t be subjected to huge losses due to volatility in the stock markets. The principal amount of a worker’s contributions will stay protected even during rough patches in the financial markets.
Second, unlike current IRAs, this security will allow for a low starting deposit and small contributions, as well as the ability to easily access the funds in cases of emergency. In essence, this is to help low-income workers put aside a little bit of money every paycheck to get a start on saving for the future. At the same time, they can have the peace of mind knowing that this money is available to them at anytime.
As we have seen so far in 2014, and what was hammered home in Tuesday night’s State of the Union, the President is pursuing an aggressive strategy to address the needs and concerns of the working and middle class. Measures such as this one shows just how serious he really is.
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