The New Government created “MyRA”; they should have named it the “WhyRA”?
They tell us there are no costs….but as the old adage goes, you get what you pay for
Last January, The President offered up the MyRA at his state of the Union address, saying that this program “guarantees a decent return with no risk of losing what you put in.” By executive action, he ordered the US Treasury to create a new program for Lower income American’s who don’t have an employer sponsored retirement plan to contribute to their own savings vehicle. (There are a few other caveats, but this is just an overview)
Now, as a financial planner, when I am told of anyone who is not putting something away for their retirement, I say any savings they can do is better than nothing. So for the MyRA, there is at least that much contributing to its redemption, But beyond that, I can offer this program no further praise. Here are the key points they have used in trying to sell the program:
- It works something like a Roth IRA, with a maximum per year contribution limit of $5,500; a $15,000 max account value (This includes principal and interest) before you’d need to move it elsewhere
- There is only one investment to choose from (A.A. – no choice at all); The G Fund from the Government workers Thrift savings plan. It is basically Government Bonds that, according to the MyRA website, has earned an average of 3.39% from Dec 2003 to Dec 2013 (although has averaged under 2% for the last 3 years). So when the President sells it as offering a decent return, I say, “in comparison to what?” Maybe a money market account offers less, but savers with long time horizons shouldn’t be putting money away for retirement in low paying interest accounts.
- They claim there is no risk to losing your money; however, there is a risk you will lose purchasing power, and again volatility or risk is not the enemy of long term savers. Not being aggressive enough is the enemy, especially for those that are in danger of living in retirement poverty. No risk usually equals no reward
- The account holders will be charged no fees (except to you as a taxpayer. Hey, someone has to pay these companies to do the work). But properly educated, I imagine most savers would rather have the alternative of paying some reasonable fees to have choice and reward. Fees are less of an enemy than low returns and opportunity lost.
It’s not only another redundant program (The government already has a tax credit for lower income folks to save for retirement that is underused), by design, it promises to under deliver on rate of return. Whenever someone has a long time horizon for their investments, the concept of taking risk to get more reward should be considered strongly, since the investor has time to ride out the volatility of more aggressive investments. If our Government wants to be in the business of furthering financial literacy, as it has wanted to do in recent years, it should not be in the business of promoting no risk investments.
By investing in The G fund, you rob the investor of the chance for growth of their investment. It is likely that this risk free rate will only provide some inflation protection but no more. Instead, if a non-savvy investor were to invest in a diversified balance mutual fund for the long term, it is likely that they would achieve far better results, even if they had to open up their own online account and have to pay some nominal (gulp) fees!!! Call it the Cynic in me, but I am wary of a big government program that is trying to encourage the working poor and the young to help The US treasury finance more of its debt, with little reward for the investor. If properly educated, most low income investors will not mind paying some fees to invest if they have the ability to make their money grow.
Don’t get me wrong, no one is required to take part in this plan, and yes, doing something is much better than doing nothing, but I see it as yet another waste of government resources that will not only hurt the working poor in the long run, but resources that could be put to better use targeting general financial literacy.
