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Exclusive Interview with Jack Towarnicky: Child IRAs will make “Middle Class Millionaires”

Exclusive Interview with Jack Towarnicky: Child IRAs will make “Middle Class Millionaires”
August 16
00:03 2016

Several years ago, having read my articles on behavioral finance, Jack invited me to speak with him on the practical side of the subject before a group of academics at the Annual Behavioral Finance Symposium in Chicago. It was there that I learned of Jack’s own familiarity with the subject and his innovative way of looking at it both from a theoretical standpoint but also from a real world one as well. I’ve always thought he would be an excellent subject for our monthly Exclusive Interview series and was delighted when he agreed to participate.

M. (Jack) Towarnicky is a benefits attorney with over 30 years of human resources/benefits leadership experience at four different Fortune 500 companies. His GREGORC© style is: “Practical Innovator.” Jack’s has a BBA-Business Economics, an MBA, a JD and an LLM-Employee Benefits and the CEBS designation.He has served on the DOL’s ERISA Advisory Council and as a director for benefits trade associations (W@W, CEB, ABC, IFEBP).He has received quite a few national recognitions (corporate, team, individual) including: National Business Group on Health, Healthy Lifestyles; C. Everett Koop Health Project, Corporate Plan Sponsor of the Year, CFED Innovative Idea Champion, Benefits Manager of the Year. 

FN: Jack, you’ve been a corporate innovator on the behavioral economics side of employee benefits management. What early interests led you to explore how people make decisions?
Towarnicky: I have had too much practical experience watching workers make investment and other benefits decision-making mistakes. My own worst mistake as a practitioner occurred when I failed to prepare participants for achange in the frequency of 401k statements from annual to quarterly. Prior to the 3rd quarter 1986, we offered an annual statement showing only the prior year and new account balance. We added a lot more information to the “new and improved” quarterly statement – including detail on investment gains and losses. That first quarter, the 3rd quarter 1986, the market saw slight increases in interest rates and minor declines in equity markets. So, for the first time ever, many participants saw a MINUS sign on their 401k statement (received in October 1986). In response, thousands of participants under age 50 migrated away from equity and bond investments to the plan’s guaranteed investment contract. I’m certain more than a few ended up working longer to prepare for retirement because of my failure.

FN: What do you see as the most important concept research in behavioral economics has given to the field of retirement savings?
Towarnicky: Maybe the use of defaults as part of 401k automatic features. Done right, automatic features offer everyday American workers an opportunity to attain “middle-class millionaire” status. 

FN: On the flip-side, what are the most misused/misunderstood aspects of behavioral economics as practiced by the industry?
Towarnicky: Maybe the use of defaults as part of 401k automatic features. Examples of sub-optimal designs include 2% or 3% defaults, defaulting only new hires, defaulting only once, retaining provisions that encourage payout at separation, etc.

FN: You and I recently submitted a proposal to the Corporation for Enterprise Development’s (CFED) Child Savings Account Directory. Can you tell us a little bit about what this program is all about?
Towarnicky: CFED plans to create a “State of the Field” document to be released later in 2016 describing existing child savings account (CSA) models and recent trends in that field. The Directory is intended to be a tool for practitioners, researchers, policymakers, and others to learn more about existing and planned children’s savings initiatives and connect with other programs. The stated goal is to connect 1.4 million children with a CSA by 2020.

For your readers, I think this is a great opportunity to partner and to focus on long term asset accumulation opportunities.

FN: Our CSA proposal focuses on one aspect of The Child IRA. Please elaborate on the specifics of our proposal and what we hope to gain by submitting it to the directory?
Towarnicky: Our CSA submission was titled: “Middle Class Millionaire.” We confirmed that any financial planner or wealth advisor could adopt our CSA program which uses the Roth IRA as the savings vehicle (available since 1998).

Only 15% of eligible Americans contribute to an IRA (ICI 2016 Data Book). So, almost all middle-class working American parents have a tax-preferred savings option to ensure their children’s financial independence.

Parents open and contribute to the IRA in their own name(s), name the child as the sole beneficiary, then control account management beyond the date a child reaches the age of majority. Payout commences (and wealth is transferred to the adult child) once the parent reaches age 59½ (tax free payout to the parent and generally gift/estate tax free for most middle-class Americans).

Parents can use “stretch-IRA” provisions (or child can use “Inherited IRA” provisions) to manage post-mortem payouts after a premature death. This strategy is very tax efficient – given the tax preferences for earnings on Roth IRA assets, coupled with the tax preference available to lower income families through the Savers Credit (See IRS Tax Tip 2011-36, 2/21/11).

Chris, in your July 12, 2016 article, “Everything You Always Wanted to Know About The Child IRA,” you noted that perhaps the most important assumption in the Child IRA was the return assumption. You used 8%, noting that 8% was roughly 3% less than the 11.04% median return for the nineteen 70-year rolling periods from 1928 through 2015 (based on the Stern-NYU annual return data for the S&P 500). You also confirmed that it was more than 2% less than the worst performing 70-year rolling period (10.21%).

So, a contribution of $1,000 per year from the year of birth could generate an account balance in excess of $2 million before the child reaches age 70 (should S&P historical performance over the past 60 or 70 years be repeated). Or, more conservatively, a $5,000 a year contribution for the first seven years of a child’s life will accumulate to $1+ million at age 70 using a more modest 5% earnings rate.

FN: What inspired you to get more involved with promoting the concept of The Child IRA?
Towarnicky: It is solely focused on leveraging time as a financial asset based on a lesson Ben Franklin taught us.

In 1785, French mathematician Charles-Joseph Mathon de la Cour wrote a parody of Franklin’s “Poor Richard’s Almanack” suggesting a person could leave a small amount of money in his will to collect interest over 1 – 5 centuries with the resulting astronomical sums to be spent on impossibly elaborate utopian projects. Franklin, who was 79 years old at the time, wrote back to thank him for a great idea and to tell him he had left just such a bequest to each to his native Boston and his adopted Philadelphia.

For Ben to take such action, he had to believe in America’s future. If you are a parent, obviously, you too believe in a future – for America and your son or daughter. Some of you may even believe your child will achieve one version of the “American dream” – where a child is better off than her parents.

For myself and my children, Andy and Dayle, I created “Ben Franklin” accounts when they were born. They are now ages 32 and 28, and well on their way to becoming “middle class millionaires,” someday!

FN: While the options to create Child IRAs today are limited, they nonetheless are out there. Where have you seen either practitioners or retail savers taking advantage of The Child IRA?
Towarnicky: We only see modest data on “stretch” and “inherited” IRAs.  As far as I know, there is little data that identifies IRA account owner age (see for example, Exhibit 7.8, ICI Factbook, at  More reporting is needed.

As Child IRAs become better known, as more Americans can envision their child’s (and America’s) future, Child IRAs will become commonplace, and we hope, ubiquitous! 

FN: Why do you keep referring to success as “middle class millionaire” status?
Towarnicky: We don’t know what $1 million will buy in 70 years. Just short of 10% of Americans have a net worth (including home equity) of $1 million. About 5% of Americans have investable assets of over $1 million. About 55 years ago, in 1962, less than 1/2 of 1% of American households had a net worth of over $500,000 (see:  2013 Survey of Consumer Finances, 1962 Survey of Financial Characteristics of Consumers). So, assuming that trend continues, chances are that in 70 years, less than 1 in 4 American families will have $1 million in investable assets. Which group do you want your children to be in?

FN: In many ways, the Ben Franklin story is instructive and suggests a way individuals can act today with an eye on the future – just in case America fails to address today’s difficult public policy challenges – like Social Security funding.  How might the Child IRA form a personal, private solution for today’s parents?
Towarnicky: Today, a sizeable minority of America’s elderly rely solely on Social Security for income in retirement. Social Security trustees confirm that starting in the 2030’s, current tax rates will only fund approximately 75% of the promised benefits.

In a survey many years ago, more young Americans believed it more likely that aliens from outer space had visited earth than they would receive Social Security benefits. My take? So long as the government has the power to tax and spend (if only to “buy” your vote), Social Security will continue to be available.

But, just in case the politicians fail to act and have to scale back the promise, wouldn’t “middle class millionaire” status be a great gift of financial independence – a gift that results from modest actions taken by a parent (or grandparent) seven decades earlier.

FN: Short of government action, what’s the best way to spread the word on The Child IRA? Who do you think should hear about the benefits of The Child IRA?
Towarnicky: Through financial institutions and (hard to believe), the IRS – as part of encouraging use of the Savers Credit. Unfortunately, few government bureaucrats believe success should be measured on how many people (and their descendants) are taken off the roles and off the dole.

FN: Do you have any other thoughts you’d like to share with our audience?
Towarnicky: Feel free to make the concept your own. Maybe you can improve on it. Keep an eye out for the CFED Directory. Look for local institutions you can partner with. Challenge any politicians who seek to scale back tax preferences such as the Roth IRA. Share with us your stories on how you leveraged time as an asset for your clients. If you need help or want to discuss, Chris and I are available to help you work through the concept and perhaps, help you craft some new marketing and communication materials.

FN: Jack, thanks for taking the time to share your thoughts and ideas with our readers. I’m sure they’ll be more than interested in learning more about how they might be able to help themselves and others through the Child IRA concept. They are invited to learn more about The Child IRA at, a site that regularly adds information on the topic.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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