A Trump administration initiative to set up investment accounts for every child has the financial services industry salivating.
Even as the plan gets mixed reviews from tax experts, asset managers are scrambling for a piece of the new Trump account program created this summer by Republicans’ domestic policy megabill.
Many are angling to help the government set up the tax-advantaged program, a job considered so valuable that the industry is pleading with the administration not to pick just one company as a so-called trustee of the program.
They say that would give too much of an advantage for landing investors to the company chosen. And industry-wide buy-in is needed if the administration wants firms’ help selling the plan to the public, they warn.
“If there is a single trustee selected by Treasury, they will have a huge advantage going forward,” said Elena Chism, a deputy general counsel at the Investment Company Institute, which represents heavyweights like Vanguard, Fidelity and Morgan Stanley.
“That provider is going to have a leg up on the IRA business for a long time.”
At the same time, there’s intense behind-the-scenes lobbying to massage the details of the still-developing plan, including what kind of investment funds can be offered. Congress stipulated the accounts include plain-vanilla investments with super-low expenses, something many financial firms are now trying to ease.
Also in question: how much in tax benefits can ultimately be had, with people in the tax world wondering if the accounts can eventually be converted into Roth IRAs.
Among those reporting lobbying on the issue are Blackrock, Ameriprise Financial, and Franklin Resources.
The scramble underscores the money at stake with one of President Donald Trump’s top tax priorities, along with new breaks for tips, overtime pay and auto-loan interest.
The initiative aims to set up investment accounts for tens of millions of children to which their parents as well as their employers, state governments and nonprofits could contribute. Contributions would be generally limited to $5,000 per year, though there are exceptions. On top of that, under a pilot program, babies born in the next four years will get $1,000 in seed money from the government.
It’s designed to introduce more people to the benefits of investing, and the power of compounded earnings, something lawmakers in both parties have supported.
With more than 3.5 million babies born every year, and tens of millions more children under the age of 18, asset managers spy a chance to win a huge number of new customers, some of whom could end up being clients for life.
“Trump accounts are going to be every American’s first IRA,” predicts Chism.
Lawmakers mostly left it up to Treasury to sort out how it will work, and the agency is now quietly hammering out the details. The department is expected to release sweeping guidance on the accounts in the next few weeks. The program doesn’t go live until next summer.
It will be complicated to stand up, a task reminiscent of the Biden administration’s efforts to send monthly Child Tax Credit payments to millions of kids.
It’s still unclear how people will sign up, for example, with some surmising there might be a box to check on a tax return. Some agency veterans suggest connecting the program to the process of getting a birth certificate or Social Security number.
Enrollment should be automatic, said a spokeswoman for Sen. Ted Cruz (R-Texas), who sponsored the legislation in Congress that was incorporated in the GOP megabill. “Every American child should be automatically enrolled in a private investment account seeded with an initial $1,000 at birth,” said Macarena Martinez.
In a statement, a Treasury spokesperson said the accounts "will serve as a vehicle to create generational wealth for millions of kids in red states and blue states and provide access to the nation's financial system on a scale never seen before in American history."
The initiative joins a crowded and confusing field of tax-advantaged savings plans the government already offers, though it will fill a niche.
Trump accounts function like an IRA, but they don’t have the IRA’s requirement that beneficiaries have earned income, something that typically prevents parents from setting up retirement accounts for their kids until they are 16 years old. Some employers, like Uber and Dell, have already said they will contribute to Trump accounts set up for their employees’ children.
Some say the tax benefits are meh compared to other options. Unlike 529s, used to save for college expenses, people will have to pay taxes on the distributions. Not just that. They have to pay ordinary income tax rates in some cases, not lower capital gains levies. That, along with the accounts’ hyper-partisan name, could turn off some parents of kids who don’t qualify for the seed money.
But given the bipartisan support for similar initiatives, many suspect it’s only a matter of time before Congress makes them more generous. Sen. Cory Booker (D-N.J.), for example, has a similar proposal that would have the government contribute up to $2,000 each year to such accounts, in addition to the seed money.
Meantime, the industry is pressing Treasury on a number of issues.
If the department goes with a single private-sector trustee, it’s asking that any website created for the initiative not be branded with the chosen firm. And regardless of who is picked, they want easy rules for rolling over money to other providers.
They’re also pressing the department to ease rules on which investments may be offered.
Congress stipulated that the accounts have a super-low 0.1 percent expense ratio, which would appear to favor low-cost providers like Vanguard. Lawmakers also said the investments must “primarily” be in U.S. companies and don’t use leverage. That would seem to exclude managed funds as well as many international investments. Some asset managers may not have any investment offerings that meet the criteria.
There’s also the question of what happens with the accounts when kids turn 18. Beneficiaries can begin taking out money then, without penalty, for certain purposes like buying a home or paying for college.
And when the kids become adults, the accounts will transform into traditional IRAs, but it’s not clear if they could be converted into Roth IRAs, where people pay tax on contributions to the accounts but not on the money that later comes out. That’s a potentially big deal because many 18-year-olds don’t make enough money to owe income taxes, so it could give them a way to avoid paying taxes entirely.
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