President Obama’s plan to create a “starter” workplace retirement plan for workers could affect insurance agents and financial advisors in subtle ways. Depending on how the program unfolds and how advisors respond, that impact could either introduce stressors for advisors or open opportunities.
Called myRA, for My Retirement Account, the program will enable low- and middle-income workers who lack access to workplace retirement savings plans to purchase a “starter” plan through payroll deduction at work. Obama debuted the plan in his State of the Union address, and the probable startup will be in late 2014 (see highlights in Sidebar).
Key trade groups have generally endorsed the presidential nudge to save for retirement, but they have also cautioned against making any changes to the tax benefits in current retirement products.
For instance, John Nichols, president of National Association of Insurance and Financial Advisors (NAIFA), wrote on his organization’s blog that “NAIFA supports the president’s goals of achieving financial security for all Americans, but urges modifications to approaches that would make saving for retirement more difficult or expensive.” The last was a reference to proposals to curtail current tax features in life insurance, annuities and employer- provided benefits.
The Insured Retirement Institute (IRI), the American Council of Life Insurers (ACLI) and the Investment Company Institute (ICI) have made similar statements.
LIMRA LOMA Secure Retirement Institute (SRI) said that expanding access to a workplace retirement savings program is a “laudable goal.” But it cautioned that this alone will not improve Americans’retirement savings behaviors. “Our research reveals that access coupled with automatic enrollment would significantly increase participation,” SRI said in a statement.
As the reaction unfolds, questions are surfacing about the impact myRAs would have on insurance and financial advisors. Some examples follow, along with observations that producers will need to consider within the limits of their licensure.
Will there be sales opportunities that spin off of this program? Yes, but not for a while. Once myRA accounts reach the 30-year mark or $15,000 in value (whichever comes first), account owners must roll their plans into “private-sector retirement accounts.” That’s a rollover opportunity for agents, carriers, online services or other private sector firms. The rollover amounts won’t be huge, but they can form a foundation for future growth.
Can producers provide myRA advice or consulting services to employers? Not exactly, and maybe yes. The “not exactly” is because the Department of the Treasury (DOT) is “reaching out” to employers directly, asking them to participate. The “maybe yes” is because employers, particularly smaller and medium-sized employers, might want to consult with their benefits advisors before deciding whether to participate. Initial plan details say nothing one way or another about this or about follow-up advice and counsel, so that’s the “maybe” part of this. Still, since benefits advisors routinely provide all sorts of guidance, such involvement is likely a given.
Isn’t this just a government-run individual retirement account that will compete with producer efforts to sell individual IRAs or IRA-annuities? Not exactly. First, the myRA will not be a traditional IRA such as those sold in the retail market or in payroll deduction plans. It will be structured as a “lite” version of a Roth IRA. But it will have distinguishing features – such as only one investment (a government retirement savings bond) and a force-out after 30 years or $15,000 – that take it out of the running when compared to a Roth IRA.
It’s worth remembering that the monthly or biweekly crowd doesn’t top the charts of IRA contributors anyhow. For instance, a Congressional Research Service (CRS) study of third-quarter 2012 ICI data found that more funds flow into traditional IRAs from rollovers from employer-sponsored pensions than from regular contributions. Besides, the number of households owning traditional or rollover IRAs has been in decline, according to a CRS report that spanned the years 2007-2010. That was based on analysis of data in the Federal Reserve’s Survey of Consumer Finances.
Might myRAs be a competitive threat for advisors who serve the 401(k) market? That’s a no, and a maybe yes. On the “no” side, the myRA will target the small business market, where retirement plans such as 401(k)s are not commonplace. In a March 2013 report, the U.S. Bureau of Labor Statistics (BLS) found that retirement benefits are available only to 49 percent of workers at smaller establishments versus 82 percent at medium and large establishments. Besides, as SRI has reported, even when such plans are available, not all workers participate.
“The dollars and cents are so low in the small business market that many agents and financial professionals just won’t go after the business,” David Kinder, a chartered financial consultant in Riverside, Calif., said in an interview. For that reason, he thinks the presence of the myRA program will not compete with private sector plans and representatives.
As for employers that do have 401(k) plans installed, Treasury Secretary Jacob Lew has been saying that the myRA will be compatible with such plans. Seasoned advisors have three words for that: “We shall see.”
As for the “maybe yes,” this has to do with a perhaps unlikely, but still possible, outcome. Some employers, especially smaller employers that struggle for profitability, may view the myRA program as an enticing, low-cost alternative to keeping an existing but burdensome 401(k) program. Then again, shutting down an existing 401(k) program involves a pile of work, and it would sharply curtail workers’ retirement savings prospects, making the cure worse than the disease. Hence, swap-outs seem iffy.
Will agents and advisors be able to offer wraparound services to employers that participate in myRA? Some advisors might find a way to make it “work financially,” said Kinder, for instance by partnering up with a bank or other firm that bundles payroll deduction, checking, credit card accounts, small saving accounts, etc., for employer clients. Although he said he is not sure what that might look like, he is sure of one thing – that commissioned and fee-based advisors are not going to go after this business without compensation.
Can producers coordinate other benefits programs around myRA? The answer is, why not? If an employer client has agreed to participate in the myRA program, that could become a platform for discussions with the client about 1) other voluntary benefits programs; and/ or 2) other retirement solutions in the individual as well as the workplace market. Agents and advisors use new programs as door openers all the time, and this will be no exception.
Will the heightened publicity around myRAs spark renewed consumer interest in small-deposit flexible-premium fixed annuities? Probably not. It’s true that some of these individual, privatesector products have attributes that are very similar to those of the myRA. But Danny Fisher, publisher of The Fisher Annuity Index, said the dominant trend is definitely away from carriers offering small-premium contracts, whether flexor single-pay.
“We have 69 companies in The Fisher Annuity Index,” he said in an email. “Only eight of them have fixed annuities that will accept monthly premiums of $100 or less, and most of them are heavy in the tax-sheltered annuity market that requires smaller premiums. In years gone by, there were lots of flex-pay contracts that would accept smaller monthly premiums. Not so anymore. Companies just don’t want to fool with smaller amounts.”
Then again, Kinder predicted that some professionals will take to viewing myRAs as if they were small annuity transactions – ones that will help workers build up savings for rollovers down the road.
But, he asked, will savers in the target market keep on saving once they have started the plan? “Just think of what younger workers do with their 401(k),” he said. ”They will cash it out or loan it out if they need the money for something else.” The big question he has is, who will be there to be sure the worker is making good decisions?
Some industry professionals are pondering myRA at the macro level. In particular, they are wondering whether the program is actually privatized Social Security in sheep’s clothing. The myRA is set up to roll into a private-sector retirement plan at a future date, they point out, so wouldn’t that be privatizing the money via a government-plan doorway?
The administration is not positioning it that way. It’s promoting the program as a voluntary starter retirement plan, not a virtually mandatory social insurance program. Besides, the maximum value of a myRA account is so low as to be minimal for meeting retirement income needs.
Then again, Social Security started out in the late 1930s as a supplement to a primary worker’s pension and personal savings, and look where it is today. That is what gets the skeptics going. Could myRA mushroom and morph into a Social Security replacement someday? If so, how would agents and advisors wrap around that?