The launch of myRA by the U.S. Department of the Treasury is intended to encourage consumers who lack a traditional 401(k) or Roth IRA to save for their retirement. Noble though the program may be, its flaws greatly outweigh its positive attributes.
With limited investment options and a lifetime contribution cap at $15,000, the program is the financial equivalent of the Groucho Marx joke about the doubly-damned restaurant: the food is bad, and the portions are small.
Of course, there's a significant need for a retirement planning overhaul: a large percentage of Americans either do not have any money saved for retirement or lack enough savings once they reach the age of 65 to fully fund those years. The 2015 Federal Reserve Report demonstrated that 31% people who are still working said they have no retirement savings or pension at all. Employees who are close to retirement age average only $12,000 in savings, according to a 2013 report by the National Institute on Retirement Savings.
Many smaller companies still do not offer their employees a retirement plan such as a 401(k), and 42% of individuals attributed that as a reason for not saving for retirement, according to the 2015 Federal Reserve Report.
“Savings is a critical step that each of us should take on our own as early as possible,” said U.S. Treasury Secretary Jacob Lew in a written statement. “For many, starting to save for retirement can be intimidating. Many are concerned they could lose their hard-earned money on risky investments or be charged excessive fees.”
Benefits of myRA
Aimed at boosting the number of people saving for retirement, myRA does not charge any fees and does not require a minimum balance to open an account. Consumers can either fund their account from their checking or savings account through automatic deposits or a one-time contribution. Another option is that they can ask their employer to fund the myRA through an automatic direct deposit. Any federal tax refunds can also be allocated entirely or partially into the myRA. The goal of a myRA is to serve as a “bridge to other savings options that will carry them the rest of the way,” Lew said.
The accounts are backed by U.S. government savings bonds and myRA is “meant to be a starter account,” so savers can transfer these funds into a private-sector Roth IRA as their nest eggs grow,” he said.
Since myRA is intended to mimic a Roth IRA, the eligibility and contribution requirements are the same. Individuals can contribute up to $5,500 a year to a myRA account or $6,500 per year for individuals who will be 50 years of age or older at the end of the year. Money withdrawn from a myRA is tax free and does not incur any penalties. In order to be eligible, individuals must earn less than $131,000 and married couples who file taxes together must earn less than $193,000 a year.
The myRA accounts are a step in the “right direction” in helping to bridge the massive gap in retirement savings in the U.S., said Jamie Hopkins, a retirement professor at the American College of Financial Services in Bryn Mawr, Pa.
It should only be viewed as one of the many options and tools which can help make more Americans more financial secure, especially ones who are not offered a 401(k), he said.
“The myRA will bring added attention for the need to save a portion of one's paycheck,” Hopkins said. “The more someone can automate their savings, the better off that person will be in the long run.”
Drawbacks of myRA...
The only investment option in a myRA account is a government bond. While it is a very “secure” option, a traditional Roth IRA allows consumers to choose from thousands of ETFs and mutual funds, Hopkins said. The interest earned in a myRA account is the same rate as investment in the Government Securities Fund, which earned 2.31% in 2014 and an average annual return of 3.19% over the ten-year period ending December 2014, according to the myRA website.
“As someone is just starting to save for retirement, it is recommended that they have a higher allocation in stock and a lower allocation in bonds,” he said. “The myRA is a Roth IRA that has more limitations than a traditional Roth IRA.”
One major drawback is that savers do not have any choices in how their money is being invested and the account is capped at $15,000, which is woefully too low for a retirement account, said Chris Carosa, a financial advisor in Rochester, N.Y.
Retirement savers are forced to invest in ‘risk free’ government bonds which are inappropriate investments for long-term retirement savers,” he said.
While consumers can not lose the principle or initial savings they allocate into the account, these safer investments are preventing people from saving enough money since they are missing out on “adequate” earnings potential of compounding interest, Carosa said.
“While the advertised rate or 3% per year is far greater than similar fixed income requirements that offer little to no risk to your principle, long-term investors are generally concerned with risk of inadequate long-term growth,” he said.
Since the demographic targeted for myRA account are younger workers such as Millennials and Gen X-ers and have 40 to 50 years to save, these investors are missing out on the returns that equities generate, resulting in a larger amount of savings.
“The most likely returns for equities in the span are greater than 8%,” Carosa said.
Many employees could open an IRA or Roth IRA account instead, giving them greater investment options as they advance in their careers. For workers who lack access to a 401(k), they can search for firms who offer no-fee IRA accounts without a minimum contribution and allow you to invest in "No Transaction Fee" (NTF) mutual funds which have long-term growth investment objectives, he said.
“While the relative lack of access to 401(k) plans is a real problem, all workers currently do have access to retirement plans such as IRAs and many institutions can handle automatic deduction from retirement saver accounts,” Carosa said.
The myRA accounts could be a “better starter savings vehicle” for a low income individual than a traditional IRA because of the “Roth tax treatment of the myRA” and the ease of access to contributions, said Hopkins.
“The biggest limitation is the investment options,” he said. “However, the myRA is not without its benefits over a Roth IRA. The myRA will benefit from the simplicity of being set up at work.”