Regardless of your political persuasion, when the President makes his yearly State of the Union address, it’s a good idea to tune in. Listening to the address helps you to be an informed citizen and understand how governmental decisions and programs may affect you. In the 2014 State of the Union, President Obama talked about matters of national importance like healthcare, the minimum wage, national security, and even saving for retirement with a new initiative called the MyRA.
Described on WhiteHouse.gov as a “simple, safe, and affordable starter savings account to help millions of Americans start saving for retirement,” the MyRA aims to decrease the shockingly high percentage of Americans (45%) who have no retirement account assets.
Why would the President give such prominent attention to retirement investing? To answer that question and to understand whether or not the MyRA solves the retirement savings crisis, we need to take a step back and consider the current state of retirement saving.
Why We’re in a Retirement Crisis
In order to get a true flavor for the current retirement predicament in the US, you have to look back at how things were handled in previous generations. Then, most larger corporations offered their employees what was referred to as a Defined Benefit Plan.
The employer would put aside a certain percentage of employees’ salary each year into an investment fund and upon retirement, the employer would pay out those funds to employees for the rest of their lives. This pension provided relative security as employees could count on the funds being there when they retired and it required little responsibility on their part.
Fast forward to 1978 and Congress enacted the Defined Contribution Plan, the most popular of which is the 401k. This new retirement investment vehicle began to shift responsibility to invest and manage, as well as potential cost, to employees to handle themselves. The 401k began to take hold fairly soon with larger firms shifting to these plans as early as 1979.
As a consumer, you have some advantages in a 401k. You get more control over how much is saved, how the funds are invested and how they’re watched over. If you leave the company, you get to take your money with you. And best of all, your employer might even supplement your contributions with a “match” – free money for you.
Unfortunately, what may sound good in theory has on some levels, led to such a severe deterioration of retirement savings in the US that many have called it a crisis.
The following statistics highlight the severity of the crisis:
- 48%, or 44.5 million workers, worked for an employer who did not offer a retirement plan as of 2011 – according to the National Institute on Retirement Security (NIRS).
- Approximately 45% of households, or 38 million households, have no retirement account assets (401k or otherwise).
- The median value of retirement account balances is $3,000 for all working-age households and slightly higher ($12,000) for those near retirement age.
- The collective gap within all working-age households, from ages 25-64, is anywhere from $6.8 Trillion to $14 Trillion, with a staggering 92% of working households not meeting their given targets.
- Less than 1 out of 10 eligible working age individuals voluntarily contribute to an IRA.
Taking a look at the above numbers gives a little insight into why the President discussed saving for retirement during his address. With that in mind, a more in depth look at the MyRA is necessary.
What is the MyRA?
The MyRA is the attempt by the government to make retirement vehicles available to those who lack access to a retirement fund at their current workplace. The aim of the MyRA is to make it easy for many Americans to save for retirement and to do it on their own terms so as to encourage those who have not begun saving for retirement to begin doing so. Ultimately, the goal is to decrease the number of 45% of the population that has no savings.
In order to make a fair assessment of the MyRA, you need to consider its features:
- Improved access. The MyRA is intended as a starter savings account for those who currently do not have access to a retirement savings vehicle at their place of work.
- Guaranteed. It offers principal protection in that it’s backed by the U.S. Government and is guaranteed not to lose any principal. The MyRA is tied to the same variable rate as the Thrift Savings Plan (TSP), which is offered to federal employees.
- Roth-like. It acts like a Roth IRA in that contributions are after-tax, and they can be withdrawn tax-free at any time.
- Low minimum contributions. The MyRA is meant to be simple to begin and contribute; it can start with a contribution as little as $25. Future contributions can be as little as $5 through payroll deduction.
- Contribution limits. Those who choose to participate in the MyRA can contribute up to $15,000 over its life, at which point it must be converted into a Roth IRA. This conversion can also be done at any point in the life of the MyRA. The MyRA also has a maximum life of 30 years, at which point it must then be converted to a Roth IRA.
- Income limits. The MyRA is available to any household that makes up to $191,000 per year, or $129,000 for single individuals – thus making contributions simple for lower to middle income class families and individuals.
- Employer adoption. The program will be launched in late 2014, by employers who choose to offer it (forcing employers to offer it would require Congress to approve). The MyRA will not be administered by employers nor will they contribute to them; they simply will or will not make it available to their employees.
- Portability. The MyRA is portable in that workers can transfer it to new employers, assuming the new employer offers the MyRA as well.
The MyRA should not be confused with a Traditional or Roth IRA. Whereas the MyRA is offered strictly through the employer and tied to a specific government backed bond, a Traditional/Roth IRA is generally opened through a brokerage or investment advisor. A Traditional or Roth offer various tax benefits, depending on your specific tax situation and can also be invested in a variety of investment vehicles from equities to bonds to mutual funds/ETFs. That feature is not currently possible for the MyRA.
Benefits of the MyRA
Looking at the features of the MyRA you can see that the President is wanting to make it as easy as possible to start saving for retirement. This has been a key issue for many who don’t have that access today as they might not be inclined to look outside their employers for retirement savings options, or be held back because of minimums to open accounts at various investment/brokerage firms. These factors combine to make it difficult for those with little capital to start the snowball process of saving for retirement. It’s easy for people to try, get frustrated and give up before they truly get started.
Imagine if you will, for a second, that if you’re in a lower paying job that does not offer a retirement plan. There are several barriers to starting your own retirement account. First, many firms have $1,000 – $2,000 minimums to open accounts. Second, it’s intimidating – not just figuring out what institution to go to, but also what account type to select or investment options to choose.
Academic research from Shlomo Benartzi and Richard Thaler finds that people are “slow to join advantageous plans, they make infrequent changes and they adopt naïve diversification strategies.” Saving for retirement requires not just access and money to set aside, it also mandates a degree of financial literacy and self control that many who aren’t currently saving for retirement don’t possess.
The MyRA addresses these barriers by making it easy to open and non-intimidating by offering extremely low minimums. Second, while it’s not required for employers, it’s theoretically easier for employers to adopt and offer to employees – thus making it easier for people overcome behavioral hurdles.
The MyRA has some of the other great attributes of workplace retirement plans. First, like 401ks, the MyRA is also portable. If you open a MyRA through your employer and change jobs you can take it with you (with less friction), assuming your new employer also offers the plan. If that’s not the case, then it can always be converted to a Roth IRA.
Finally, and perhaps most importantly, MyRAs are unique in that they will be backed by government bonds. That provides MyRA investors the security that they won’t lose their principal value.
Drawbacks of the MyRA
As with most things, while there are many benefits to the MyRA, there are also several drawbacks.
The biggest drawback is that you may not be able to participate in the MyRA program as it’s dependent on employers to offer them or not. If you’re in a job that does not offer a retirement investment vehicle, or in a part-time role that doesn’t allow you access to the retirement savings plan, then you are still on your own in terms of saving for retirement.
In addition to this participation issue, the MyRA can only be grown to $15,000 at which point a decision will need to be made in regards of how to invest the funds in the Roth IRA it would need to be converted to. At this point, you would bear more onus on determining what investment vehicles you’d want to put the funds in.
The final drawback is the limitation in investment options offered within the MyRA program – and low rate of return. The MyRA will have the same returns available to federal employees (it’s tied to the Thrift Savings Plan), which are low single-digits. You won’t lose your principal investment, so it’s both safe and more attractive than the returns you’d get in protected savings accounts. However, it’s significantly lower than equities or index funds, which could be more important dependent on your specific risk tolerance.
With the benefits and drawbacks of the MyRA in mind, you really need to take a look at your specific situation to determine whether or not the MyRA is good for you.
Does the MyRA Solve the Retirement Saving Crisis?
Having considered the state of retirement saving in America and the features, benefits and drawbacks of the MyRA, it’s unlikely this is the complete solution that will turn the tide of non-saving by Americans for retirement. While the MyRA is a step in the right direction, and makes it easy for those with access to begin saving, the fact that it’s not mandatory leaves it unclear as to how many Americans who aren’t currently saving will have access to this vehicle.
Without any incentives for employers to offer the MyRA to their employees and no incentives for employees to participate (like matching contributions such as are common with 401k’s) it’s hard to see that the MyRA is gets significantly more Americans saving for retirement.
Instead, a few tweaks to the MyRA could have made it more appealing and effective in encouraging Americans to start saving for retirement.
Some suggestions to make the MyRA plan better:
- Make employer participation mandatory, similar to the systems in Australia and Singapore (this will require Congressional approval)
- Keep the MyRA no cost for employers to offer
- Offer other options besides the government-backed bonds for employees to invest in such as low-cost index ETFs
- Add a no-cost educational component geared toward teaching employees about the importance and mechanics of saving for retirement that initiates upon opening a MyRA account
As it is now, the MyRA is not is for everyone. Individuals above the government instituted income who are already well on the path to growing a healthy retirement portfolio won’t be helped by the MyRA. Individuals working in lower-paying jobs or in ones that don’t offer retirement options are the ones best-suited for the MyRA – if their employers decided to offer it.
While the MyRA may not be the solution to reversing the retirement saving crisis in America, it can be a step in the right direction for some who aren’t currently saving. Instead of waiting for someone else to step in with a solution, working individuals are well-served by taking their retirement saving into their own hands by starting to save today.
Photo courtesy of: RCB