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Finance Industry Pros: MyRA Misses The Point

February 04
00:14 2014

(This is the first in a series of articles detailing the retirement community’s response to the MyRA proposal.)

Here at FiduciaryNews.com we have a policy of avoiding current news, preferring to let issues stew in the pot of everlasting memory. In this way, we’re sure our articles will endure. Indeed, some of today’s most popular FiduciaryNews.com 1071009_34388507_Target_Miss_royalty_free_stock_xchng_300stories were written months, even years, ago. Every once in a while, though, a contemporary topic arises that, while current, needs addressing, especially when it provides an opportunity to bring up long-standing concerns. In last week’s State of the Union Address, the President raised a topic of concern – retirement readiness – that received immediate plaudits. Unfortunately, according to many retirement experts, he offered a solution that both betrayed a lack of knowledge in the nature of the problem and a surprising lack of financial literacy. But, let’s not get ahead of ourselves…

We surveyed financial industry professionals across the countries for their thoughts on the President’s proposal. On the whole, there was universal agreement on the premise that America is not saving enough for retirement.

Stephen Rischall, vice president at 1080 Financial Group in Los Angeles, California says “the bottom-line is Americans are not saving enough to cover expenses through retirement, and – let’s face it – social security is not filling that gap anytime soon.”

“The proposal is trying the address the dismal savings that most Americans have set aside for retirement,” says Wendy Kowalik, President, Predico Partners, LLC, San Antonio, Texas. “As pension plans are relics of days gone by, our country is facing a looming crisis of Americans who have not even set aside enough to fund a meager retirement. With the evolution of credit, many Americans young and middle age do not have the savings mentality the depression era generation held. The proposal is trying to get American’s in the mindset of saving.”

Simon Moore, Chief Investment Officer at FutureAdvisor in San Francisco, California, says, “America’s savings rate at sub 5% is too low. It’s very hard to get Americans to a comfortable retirement without saving more, the savings rate needs to be closer to 12%.”

While there’s general agreement on the main problem – lack of savings – most aren’t clear why MyRA is needed to address that problem. Robert Schmansky, president of Clear Financial Advisors in Livonia, Michigan, says, “many of the individuals this plan targets can already choose to save to ROTHs. Most likely these individuals also are in desperate need of growth assets, and so I am not sure who the proposal is actually addressing anyone’s actual needs.”

There’s even disagreement on whether a perceived problem the MyRAs can fix is really a problem at all. “The only gap filled by the MyRA is with individuals who cannot afford to contribute the $1,000 minimum Roth IRA investment at places like Vanguard or Fidelity,” says Jason Lina, Lead Advisor at Resource Planning Group, LTD. in Atlanta, Georgia. But Andrea Travillian, President, Smart Step, Inc, Dallas Texas, counters this when she says, “Most existing vehicles can address these needs, the biggest gap that exists is in the low minimum investment required. Many mutual fund companies require a starting deposit of at least a $1,000 if not more, plus additional investments of about $100. However, there are funds that have lower minimums and are better suited to retirement.”

Even the basic premise of the number of individual affected is questioned. “It is often quoted that only half of Americans are covered by a workplace retirement plan,” says Justin Bonestroo, Executive Vice President, Actuarial Consultants, Inc., Torrance, California. “This stat is misleading because that takes in account self-employed, part-time and newly employed employees who haven’t yet met eligibility.”

Indeed, many feel the MyRA is simply an echo of existing savings options. “Anyone with income can invest in an IRA, and choose between pre- and post- tax investing,” says Ilene Davis, at Financial Independence Services in Cocoa, Florida. “And if they want it in government bonds they can do so. For small amounts, I’m sure they could work with their bank to put small amounts into a savings account and periodically buy a government bond with it. For someone who wants what is essentially a ROTH IRA invested in government bonds of a country deep in debt, the option already exists – and maybe with help of a financial advisor, someone might be educated on other options that have better wealth creating potential.”

“The various types of retirement programs available to individuals and employers are more than adequate to address the retirement savings needs of most Americans,” says Rischall. “The issue at hand is that not enough people are using them, and for those that do many aren’t saving enough.”

Michael Prus, President at Scale Investment Group, LLC in White Lake, Michigan, agrees with his fellow professionals. He says, “As a whole, Americans do not save enough. This is a problem that has been thoroughly and regularly covered by the media. The reason for our low savings rate is two-fold, a) we either can’t (or think we can’t) afford to save more or b) choose not to save for our retirement. Current retirement plans, whether they are employer sponsored plans like a 401k or savings vehicles you can put in place yourself, like a ROTH or a Traditional IRA do not address the savings issue head on, unless an employer sponsored plan has effective education component. Based on what we know about the myRA, it also fails to encourage greater savings.”

Kowalik says the MyRA “mirrors the existing deductible Roth IRA rules that are in existence today. In addition with a max of $15,000 before having to roll into a private plan, and the lack of growth with only a Treasury bill investment, this is a far cry from a retirement solution for this nation.”

The problem of increasing savings is one that vexes current options. Academic studies show people don’t necessarily do what’s in their own best interests, and the lack of full participation in existing 401k plans – that offer free money to savers in the form of corporate matching – remains the best proof the problems goes beyond the mere availability of a savings vehicle.

“This is a waste of time and government energy,” says Bill Hammer, Jr., President and CEO of Hammer Wealth Group in Melville, New York. “They should spend the time addressing the long-term issues of Social Security, simplify the tax code, or simplify the already confusing retirement account landscape. We have the ROTH IRA, Traditional IRA, SEP IRA, SIMPLE IRA, 401k, 403b, and so on…..did we really need another?!?!?”

Some, including Prus, have taken a more cynical approach to the idea. “I think President Obama sincerely wants to help Americans save more but his myRA program does not accomplish this goal,” he says. “It is limited in the amount of money that can be set aside by investors in the plan and the type of investments available. It fails in its stated purpose but does a reasonable job of confusing already confused consumers more by giving them another option they don’t need or want. Additionally it will provide jobs for Washington bureaucrats as they iron out and implement the details and if it catches on provide a steady stream of buyers for government debt.”

“I fail to see how these will become adopted just because they are an option,” says Schmansky. “The retirement savings crisis isn’t about an account, it’s about the lack of competent and independent advice that individuals can receive. While I applaud the idea of increasing savings, adding another account type to the mix that are available without addressing the core problem that individuals need quality advice is misguided.”

Patrick McGonigle, Financial Advisor at CJM Wealth Advisers, Ltd. in Fairfax, Virginia, believes the MyRA “is window dressing. The bigger issue here is financial literacy. For workers who are only saving $5-10 per month, they are likely living on the edge, financially speaking. They likely don’t have an emergency fund, and if or when they take out the money, they will need to pay a 10% penalty tax. Furthermore, these accounts will be invested in a government bond type of product that will likely lose money after inflation. It is naïve to think that someone who cannot afford a custodial fee to maintain an IRA will be financially able to retire.”

“The problem is the average person never received any personal financial education during high school or college so they aren’t aware of their savings options and they are overwhelmed by investment choices,” says Steven Elwell, Vice President at Schroeder, Braxton & Vogt Financial Advisors in Amherst, New York. “Financial education is likely a better solution than creating myRA.”

Bonestroo thinks “the effort is sincere, but somewhat misguided. Any effort to expand coverage and ensure that more Americans are covered by a workplace plan is a good idea, but the focus should be on improving the system that we already have and addressing areas where it may fall short, rather than creating an entirely new, government run, system with limited options.”

“The real retirement crisis is one of a lack of planning,” says Schmansky. “Our regulators and industry associations should be pushing for more access to financial planning for retirement savers.”

Coming Tomorrow: Part II: Ten Reasons Retirement Experts Want You to Say “No” to MyRA

This was another one of our longest articles. If you’ve made it this far, you must really be interesting in learning how to build a better education strategy for your 401k plan. If this is the case, you may want to purchase Mr. Carosa’s book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans. The book also contains a series of chapters on benchmarking, including how to create a plan “report card” to better evaluate its effectiveness.

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About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA

3 Comments

  1. Ryan Matthey
    Ryan Matthey February 04, 12:39

    You made a typo when Quoting Justin Bonestroo in the eighth paragraph. Should be “who haven’t yet met”.
    Thanks,
    Ryan

  2. Hubert Bromma
    Hubert Bromma February 05, 17:04

    The MyRA will likely be adopted by some individuals and couples in the cohort outlined by Treasury. It is important to note that the funds will be placed in US government securities, and therefore be used by the cash strapped government. Have we not seen Social Security trust funds used for other than purposes intended?

  3. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author February 05, 17:17

    Thanks, Ryan. That one’s on me. I should have caught it. It’s fixed now.

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