The best thing about the awkwardly named “myRA” (indistinguishable from “Myra” for Google’s algorithms, which is fun) recently unveiled by President Barack Obama is that it may be a sign Washington is seriously worried about our retirement.
They should be. We’re in the middle of a long-term transition from a defined benefit retirement system, where workers get to finance their retirement with pension checks from their former employers until they go to that big RV park in the sky, to a defined contribution system, where workers are pretty much on their own to save.
That transition isn’t going great. According to a 2013 study by the Employee Benefit Research Council, 43 percent of American workers say they are not currently saving for retirement and 28 percent reported having saved less than $1,000 total. TOTAL.
Kind of a nothingburger
A good way to reduce the number of those not saving would be to create IRAs for all Americans who don’t have a 401(k) and make enrollments automatic, meaning you’d have to opt out not to save, says Jeff Brown, a professor of finance at the University of Illinois, Urbana-Champaign.
“We have enormous evidence that automatic enrollment … has a very big effect on participation rates,” Brown says. “Were that to ever happen with IRAs or small employers, that could really change things up.”
But that’s probably not going to happen anytime in the near future, what with Congress having pretty much decided it opposes anything President Obama supports. So instead we get the “myRA,” put together by the Obama administration and announced during this year’s State of the Union address.
“There’s limited downside to the myRA thing,” says Brown. “It’s worth trying. Some people will make use of it, and that’s good. But I don’t think it’s going to fundamentally reshape the retirement landscape.”
But that doesn’t mean it’s all bad. Think of it as a set of training wheels for those who’ve never tried riding the retirement saving bicycle, and who work for employers too cheap/lazy/indifferent to offer a real 401(k).
“It’s basically the federal government trying to provide a low-cost, easy-to-implement option for employers to provide a Roth-style IRA to their employees, but without having to take on the cost incidence or fiduciary risk normally associated with providing a retirement plan,” says Brown.
The pros and cons
Here are some pros and cons of the plan, which should be available to employers later this year:
Pro: It offers an automatic retirement saving program you can contribute to with minimal effort.
Like a 401(k), the program will be offered through your job, mostly so part of your paycheck can be diverted automatically into the account. That’s actually a pretty important feature, says Brown, because it makes it much easier to save.
Con: myRA funds can’t be invested in stock mutual funds or bonds. Instead, the money will go into guaranteed government bonds that will provide the same return as the Government Securities Investment Fund available to federal employees (for a frame of reference, the “G Fund” has returned 1.89 percent over the last 12 months ). Because of that, your savings likely won’t grow the same way it could in a well-managed 401(k).
“The return will be commensurate with the risk and since there’s virtually no risk, there’s going to be very little return,” Brown says.
Pro: But the accounts also won’t start hemorrhaging money the next time Wall Street decides to blow up the world, a major reason why many Americans have soured on retirement saving and investing.
Con: Unlike a traditional 401(k), myRA contributions will be made after taxes are already taken out, meaning they won’t be able to reduce your tax bill upfront. Instead, they’ll work more like a Roth 401(k), where your eventual withdrawals will be tax-free.
Pro: Because your contributions are made after taxes, you can take contributions (not earnings) out before retirement without paying a penalty, allowing it to be used as a de facto emergency fund. Of course, that might also be a con because it makes you more likely to loot your retirement savings to buy a new PlayStation 4.
Con: Remember when I said myRAs were like training wheels? Well, at some point the training wheels have to come off — and that point for myRAs is a savings level of $15,000. After that, savers have to roll their accounts over into a Roth IRA held with a private company. (There’s also a time limit of 30 years.)
Pro: You need very little money to get started. The minimum contribution to start the program is $25, and employees can contribute direct deposits as low as $5 each payday.
“The minimum investment amount is very small,” Brown says. “Most private providers are not going to allow accounts that small, just because of the typical costs associated with managing account. So the Treasury is basically allowing a way for people to get started and build up an account balance so they can then take it to a private provider.”
Con: There’s an income limit of $191,000 for families or $129,000 for individuals. But if you’re making that much and not saving adequately for retirement, you probably just need a meaner accountant.
Pro: Employer 401(k)s often come with an embarrassing amount of fees that can drastically reduce returns; myRAs don’t have any.
The bottom line: this is a modest program that will probably have a modest benefit for workers, and probably isn’t going to save your bacon if you’re headed into retirement with little to no savings.
“If you’re an older and you’re on the verge of retiring and you’re just now starting to think about savings, this is not going to save you,” Brown says.
What do you think? Do you plan on enrolling in a “myRA” if it becomes available?