How the U.S. government is making it harder to retire

Tens of millions of Americans have set little money aside for retirement, battered in recent decades by one financial crisis after another and adrift in an economy that has gradually shifted the burden of saving almost entirely on employees. Now they can point to another impediment: The U.S. government. 

In only the most recent example of actions by Washington that hinder saving, the Treasury Department last week moved to cancel the myRA program, a "starter" retirement account that came into existence barely two years ago. Earlier this year, meanwhile, Congress rolled back a rule that made it easier for states to create their own publicly run retirement accounts. Some experts also worry that a new Labor Department rule that requires financial advisers to act in their customers' best interest is on the chopping block.

"The government's action is indicative of a general antipathy to any government involvement in solving the pension crisis," said Anthony Webb, research director at the New School's Retirement Equity Lab.

About that pension crisis: The total amount Americans have saved to fund their retirement falls short of what they need by a whopping $7 trillion to $14 trillion, depending on how one runs the numbers (By comparison, total U.S. GDP is roughly $18 trillion.) This deficit has grown as traditional pensions, which were relatively generous and professionally managed, made way for 401(k) and other "defined-contribution" plans. 

Participation in these plans is largely voluntary and worker-directed, making it easy for savers to save less than they need, invest poorly and lose money to fees. Among all U.S. households that have access to a 401(k) plan  -- only about half of the workforce -- the typical account has a balance of $40,000. Experts recommend that the average person should have about $700,000 saved for retirement. 

MyRA, a government-sponsored IRA with a low and guaranteed return, was a small step toward addressing America's retirement crisis. In fact, the idea for the program came from the financial industry, according to Mark Iwry, myRA's chief architect and a former senior adviser to former Treasury Secretary Tim Geithner during the Obama administration. MyRA let participants save small amounts that would be too low to be profitable for a traditional money manager. After a myRA account reached $15,000, its owner was required to move the money into a private account. 

"We designed it from the get-go to be rolled over into the private sector," Iwry said. "The idea was for the government to just prime the pump and act as an incubator for the tiniest accounts."

During the 18 months the program was in existence, savers had put away just $35 million spread out over 20,000 accounts. The Treasury cited myRA's low rate of adoption as the main reason to kill the program, saying its elimination will save the government $10 million a year in administrative costs.

For Iwry, however, it was premature to snuff out myRA. "It's a long-term play," he said. "It's not something whose benefits would be manifest in the first year. It took several years for the benefits of the 401(k) to become evident."  

A few months before the government's decision to pull the plug on myRA, Congress moved to curtail similar programs on the state level. In May, it rolled back a rule that would have made it easier for states to offer public retirement accounts similar to myRA.

A handful of states have taken steps to create these semi-public retirement accounts, aimed at workers whose employers don't offer retirement benefits. The Labor Department last year finalized a rule that would have shielded states that established such programs from liability. Essentially, it "was a promise by the federal government that they wouldn't sue states and cities" that automatically enrolled workers in such a program, said Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at the New School.

But even without cover from the feds, several states are moving forward. Oregon's public saving program is up and running with a small number of participating employers; California and Illinois are well into the process of establishing their programs; and 20 other states this year have introduced legislation to set up public retirement accounts. 

In opposing the rule geared to helping states, GOP Majority Leader Mitch McConnell argued that state-sponsored plans created an "unfair competitive advantage over private-sector workplace plans" while lacking consumer protections.

But the consumers served by these plans are specifically those who don't have access to the private market, or at least who access it with difficulty. Moreover, the people who tell savers how to invest their money were, until recently, not required to recommend the investment that was best for their client.

Savers have lost billions on investments that were wrong for them or just too expensive, with the yearly cost running around $17 billion, according to the president's Council of Economic Advisers.

While a rule to eliminate these adviser conflicts of interest -- the so-called fiduciary rule -- finally became effective in June, key provisions of it won't be enforced until next year. The government has also reopened comments on the rule. That action, combined with the Labor Secretary's statement this year that he'd like to freeze the rule, are leading many consumer advocates to believe the government is looking to scuttle it.

In the meantime, what's a retirement saver to do? People with access to financial services can look for those that hold themselves up to higher standards. For those workers without access to a 401(k) -- whose ranks, thanks in part to the growing "gig economy" -- are only increasing, the challenge is greater. Retirement rights advocates hope that state-run public plans will prove popular enough to one day go nationwide. 

In the absence of that, many Americans will have only Social Security to rely on.