During his State of the Union address in January, President Obama introduced the “myRA.” A myRA is a retirement savings account targeted primarily towards low income-workers without access to a work-sponsored 401K account. According to the White House, the ultimate goal of the myRA is to foster retirement savings across all income levels. Given that only 57% of American save for retirement, and that only 49% of all works have access to sponsored retirement savings (like a 401K), this is a very caring goal. Given that social security is expected to go insolvent by 2033, this is a very practical goal as well. That said, the nuances of the myRA are extremely limiting, making it a half-hearted attempt to fix a very important problem.
Before addressing the negative aspects of a myRA, it is important to understand the benefits. Most importantly, the myRA account offers a way for low-income workers to develop a habit for savings. The myRA account is essentially a modified Roth IRA; deposits are made after-taxes, and earnings grow tax-free. Unlike a Roth IRA however, myRA’s have very few barriers to entry: the minimum balance to open a myRA savings account is only $25, and additional deposits can be made in increments as small as $5. Furthermore, there are no fees associated with a myRA account. Finally, for those risk-averse investors, the principal is guaranteed (much like a traditional savings account). All of these qualities make the myRA an attractive savings vehicle. Given its ease of use, I agree with Obama that, given the write promotion campaign, a myRA can encourage better savings habits among low-income workers.
That said, it is important to understand the difference between savings literacy and investment literacy. It is one thing to save money for retirement. It is another thing to wisely invest this savings so that it earns a reasonable rate of return. While the myRA program may foster savings literacy, numerous restrictions greatly inhibit its ability to develop good investment literacy.
The two most important of these restrictions are a savings cap and a requirement investment asset. Firstly, all myRA accounts are limited to $15,000. If someone’s myRA account has a value that exceeds $15,000, the excess must be rolled over into a Roth IRA (given that the principal is guaranteed, this makes logical sense; the FDIC can only afford to insure so much money). While $15,000 is a good start, it is, under almost no circumstances, a sufficient nest egg. It is my fear that this cap will signal to myRA investors (who will likely be rather savings illiterate), that the $15,000 is a sufficient quantity of retirement savings. Unless the White House develops an excellent transitions program to help individuals roll over their myRA to an IRA, this cap will likely result in many grossly underfunded retirement accounts.
The second and most important myRA restriction is its lack of investment options. Whereas a Roth IRA allows individuals to invest in nearly any security, myRA’s can only be invested in a US government savings bond called the Government Securities Investment Fund (more informally referred to as the “G Fund”). Since 2003, the G Fund has offered an annual, nominal rate or return of 3.61%. During that same time frame, inflation has averaged 2.5%. This means that the real rate of return of the G Fund has barely topped 1% in the last decade. While this return is higher than a traditional savings account, it is well below what a standard index fund (ie: Russell 2000 or S&P 500) is capable of earning. I understand that Obama wants to protect investors from making foolish investment decisions (like buying all penny stocks). But by limiting investment to the G Fund, I fear that myRA’s will foster too much risk aversion and prevent investors from growing their nest eggs at a reasonable rate.
Ultimately, the myRA is a step on the right direction. It is about time that the US Government address private savings in order to supplement social security. That said, it is important to realize that savings literacy and investment literacy are not the same thing. Thus while the myRA has the potential to foster better savings habits across low income levels, it seems to have very little potential to foster intelligent investment habits. I believe that a modification to the current social security tax would accomplish this goal much more efficiently (see my post: “Should Social Security Switch to a Defined Contribution Plan?”). Whatever happens though, it is crucial that policymakers begin to address savings and investment literacy before social security becomes insolvent.