Build wealth early: A new policy proposal

Children across the income spectrum can benefit from programs that begin asset accumulation at birth.

• Early establishment: The requirement to establish an account before the child turns 8, while not at birth, ensures early intervention. The proposed federal pilot program would contribute $1,000 for each U.S. citizen born after 2024 and before 2029, which could maximize the power of compound interest. Following the pilot program period, establishing accounts at birth would provide an even earlier start and ensure universal access from the very beginning.

Tailoring program contributions can help maximize the impact of limited resources.

• Government contributions and incentives: The federal government's contribution of $1,000 for each U.S. citizen child born between 2024 and 2029 and the fact that earnings grow tax free under the program would be a strong start. Policymakers could consider ways to maximize this impact for those who need it most. For example, the government could provide lower income families with additional seed contributions, matches, or tax incentives, or allow larger eligible annual contributions. This could help increase wealth creation and advancement for families who may be on weaker financial footing. 

A balanced portfolio made up of stocks and bonds based on a 529-style glide path could enhance the value of accounts.

• Eligible investments: The restriction to mutual funds that track well-known indexes of U.S. equities with minimal fees and no leverage aligns with the principle of low-cost, diversified investments. Policymakers might consider including a broader range of assets, such as bonds, and leveraging qualified default investment alternatives, such as those used in 529 plans, to provide more balanced growth and better risk mitigation closer to the date of withdrawals. Accounts invested in 529-style portfolios could have a material impact on a person's financial well-being. In our previous research, we estimated that if $1,000 were contributed annually from birth and invested in a 529 glide-path portfolio, by age 18, the beneficiary could have roughly $32,500 in typical market return environments.¹

• Low administrative costs: The program's structure, which includes a trust or custodial account with IRA-like requirements, suggests a well-organized and potentially low-cost administrative framework. The focus on low-fee mutual funds also contributes to minimizing costs.

• Lifelong engagement: The program facilitates contributions from tax-exempt entities and allows for family members to make non-deductible contributions of up to $5,000 annually (indexed to inflation). Allowing private contributions can strengthen involvement and ensure that the beneficiary receives the maximum benefit from these assets. Additionally, the rules for distributions and taxation encourage responsible financial behavior and long-term planning.

• Automatic portability: Lifelong engagement entails making sure assets reach the beneficiary and can ultimately be consolidated with other eligible accounts. One strategy to reduce abandoned savings is auto portability. The Portability Services Network’s auto portability program, which Congress codified in SECURE 2.0 and of which Vanguard is a proud founding member, automates the movement of an employee’s 401(k) savings account from their previous employer’s plan into an active account attached to the plan of their current employer. Auto portability of such accounts into other tax-advantaged, long-term accounts, such as 529 education savings accounts, IRAs, or employer-sponsored retirement savings accounts, could serve as a final resting spot to ensure that account funds reach the beneficiary.

In summary, by providing early access to and seed money for such accounts—and investing in a balanced, low-cost manner—these accounts have the potential to significantly enhance the financial well-being of future generations. Further enhancements, such as leveraging 529-style investment glide paths and auto portability to other eligible accounts, could further strengthen the program's impact.