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Ten Reasons Retirement Experts Want You to Say “No” to MyRA

February 05
00:01 2014

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

The votes are in and the decision is overwhelming. Retirement experts across the land are in near-universal agreement. They would not recommend MyRAs to their clients – and almost anybody else for that matter. In our previous installment, we saw how financial experts felt the MyRA fails to address the real problem of saving – a 21223_6107_billiard_ball_ten_stock_xchng_royalty_free_300lack of financial literacy. In this article, they identify ten reasons to “Just Say No” to the MyRA.

Reason #1: Create an Emergency Fund First

Patrick McGonigle, Financial Advisor at CJM Wealth Advisers, Ltd. in Fairfax, Virginia focuses on what the financial textbook says every person should do before even considering to invest any of their money. He says “I would strongly advise against this option. For savers, I first recommend that they have an emergency fund equal to 6 months of expenses in a bank account. Once this goal is met, only then should they open a retirement account.”

Reason #2: It’s Not “Riskless” Because It Doesn’t Protect Against inflation.

Much has been made of the alleged “safety” of MyRAs. Unfortunately, this statement represents the height of financial illiteracy. “MyRA is not exactly ‘riskless,’” says Charles Sizemore, Portfolio Manager at Covestor in Boston and London. “If the account is essentially a bond ladder within a Roth IRA, then it is safe to say that there is no principal risk. But remember, as with all bond investments, there is the risk of lost purchasing power due to inflation.”

Nicholas J.D. Olesen, Private Wealth Manager and Partner with the Philadelphia Group, in King of Prussia, Pennsylvania believes “this is only a political move since Roth IRAs are much better for individuals to use. It is being done in a way that makes individuals ‘feel’ better but the reality is that this type of account will most likely not earn enough interest to beat inflation by much.”

Reason #3: Investors Can’t Make Enough

“It appears the total contribution allowed to this plan is $15,000,” says Thomas F. Scanlon, Financial Advisor at Raymond James in Manchester, Connecticut. “While every dime helps in retirement, it’s hard to see how this amount of money would affect someone over a possible 25 year retirement.”

Reason #4: Current Vehicles are Better

Scanlon says, “Don’t bother with MyRA. All employees that work for a company that offers a 401k plan with an employer match should start there. Take advantage of this employee benefit. Lower income taxpayers that don’t have access to an employer sponsored 401k plan are better served with a ROTH IRA. This is not tax deductible. However, if the account is open for at least 5 years and you are over age 59 ½ then all of the distributions are income tax free. Middle income taxpayers may be better served with a regular IRA. Contribute on a tax deferred basis. Distributions would be taxable. Simply sign up to have these funds withdrawn from your checking account monthly.”

Reason #5: The Investments are Too Limited

Justin Bonestroo, Executive Vice President at Actuarial Consultants, Inc. in Torrance, California says, “I would not encourage a MyRA. If the effort is being made to establish a direct deposit to a retirement savings vehicle, it would be better focused on sending those funds to a traditional IRA structure where employees have access to a broader variety of investment vehicles and have the choice between pre-tax or post-tax deferrals.”

Reason #6: Bonds are Bad Long-Term Investments

Ironically, no more than week prior to the announcement of the MyRA, a study showed retirement investors are too conservative and invest too heavily in bonds, notoriously bad long-term investments. “I don’t see how this will be of any help to his target demographic,” says Bill Hammer, Jr., President and CEO of Hammer Wealth Group in Melville, New York. “It’s no different than a savings bond but maybe the ‘government guarantee’ will be an emotional button to get people to save. This is not going to help anyone retire. Saving something is better than nothing, but people don’t need to save. They need to invest. Investments earn a REAL return, something historically above the 3% annual inflation rate. Anything with a government guarantee is sure to give you a rate of return that will not only be low, but it will be negative after taking inflation into account.”

Reason #7: The Target Demographic Does Not Benefit from Tax Savings

Jason Lina, Lead Advisor at Resource Planning Group, Ltd. in Atlanta, Georgia says, “I cannot imagine ever steering anyone to a MyRA. There are better alternatives. If someone didn’t have $1k to open a ROTH IRA, then they’re likely not paying taxes so a brokerage account would almost serve the same tax benefits as a ROTH IRA. For this person, I would suggest saving the money in a bank until such time as they can fund a ROTH IRA.”

Reason #8: There is No Employer Matching

Olesen says, “I would not advise anyone to use the MyRA account. If your employer has a 401k or ROTH 401k option, that should be the first vehicle to use, especially if there is some form of match. The next would be a ROTH IRA (if they are eligible). Lastly, I would recommend saving into a general investment account and invest in a tax-conscious way (not trading or using investments that produce short-term income).”

Reason #9: It’s a Ponzi Scheme

“I would (and am) doing my best to talk anyone who asks me about it out of this program,” says Ilene Davis, at Financial Independence Services in Cocoa, Florida. “I personally think it will become an even bigger Ponzi scheme than social security and make Madoff look like a good guy.”

Reason #10: There’s No Guarantee the Government Will Keep Its Word

Davis says, “I think it creates a false sense of security for citizens since the amounts likely to be invested would be too small to make much difference in the future financial wellbeing of most foolish enough to participate, but I think the real reason is the federal government is running out of people willing to buy US government debt and this is a way to sucker citizens into supporting a government heading toward serious financial challenges. The government already is saying social security promises are unlikely to be kept. Who would want even more of their finances dependent on federal government promises?”

That the president sees lack of retirement savings as an issue is correct. The MyRA, though, in the eyes of at least these retirement advisors, is DOA. “I think it is an issue that needs addressed, however it is being approached the wrong way,” says Andrea Travillian, President, Smart Step, Inc, in Dallas Texas. “I actually think it is less about taking the voters’ attention away from the critical issues and more about the administration believing they are the answer to all the problems. Government does not need to be the main source of ‘saving us,’ in fact it can probably be done better by adjusting the existing vehicles.”

Which brings us to the ten scariest words you can ever here: “Hi! I’m from the government and I’m here to help.”

Retirement plans need to be managed by a fiduciary. If you agree, 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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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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12 Comments

  1. John Blossom
    John Blossom February 05, 09:27

    Chris, you have made a great contribution on this topic. These talking points need to get as wide distribution as possible. With your permission, I would like to distribute this in our exhibition booth at the NAPA conference in New Orleans.

    I have not seen anything that confirms, or disavows, whether or not the “New Plan Tax Credit”, provided for certain start-up qualified plans will be available for MyRA. It is sad that this administration has such little confidence in the private sector’s ability to innovate and provide solutions that can solve the problem of workers not having an available retirement plan. Not to mention the impact that their lack of focus on a healthy economy, jobs, and business profitability has on this topic.

  2. David Hill
    David Hill February 05, 13:00

    Chris,
    I have read and listened to individuals like Elizabeth Borzi talk about the desire of the Federal Government taking over the 401k industry because of the industry’s perceived inability to help the public. This is just the position they are taking, it’s unfounded and made up. In other words- it’s another lie. I have personally witnessed the Federal Government step in and take over the Healthcare system, College loan system, Welfare system, Banking system, and now, with saliva coming down both sides of their mouth, they are eyeing the trillions of dollars inside these plans. Their approach is stellar. Come in as a savior for the little guy, have them reach $15,000. MyIRA then automatically turns into a Traditional IRA. The government is taking the fee off the top. Then build a false tabulation of how good they have done in a down market- and then force the take over. Their “war on poverty” has cost $5 Trillion and has expanded poverty by 400%. I’m bankrupt, over budget, and have more fraud going on in my own house, then all others combined. This has somehow uniquely qualified me to manage more money. We must be stupid.

  3. retiremenguy
    retiremenguy February 05, 14:15

    Looks like an overly biased piece to me. This has the tone of comparing retirement savings versus, MyRA, but a lot of it really doesn’t. Retirement savings vehicles are generally going to be better, but let’s get real here. Reasons 1 and 7 apply not just to MyRA, treasury securities are not a Ponzi scheme, and while there is not guarantee that the government will keep its world that is true with all pension investment. Putting in such trash just discredits our message, and keeps people from listening to discussion about how there are relatively simple and low cost means to do retirement savings which can go beyond $15k limits (e.g. lifecycle funds, etc.) which will provide a better long term value for the saver. Time to get out of the echo chamber and behave like real professionals.

  4. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author February 05, 15:20

    Thanks for your comment. It’s my fault you feel this piece is biased. I should have made it more clear in this article what I write in the first part of this series. I interviewed professionals across the nation – as you can see from the range of geographies those quoted come from. The specific question I asked was “Why would (or why wouldn’t) you advise retirement savers to create a MyRA account (and, if not, what alternative would you suggest)?” Clearly, if the question has any bias, it is a bias in favor of the MyRA. In fact, in order to mitigate any bias, reporters will often ask questions in the “Why would you (or wouldn’t you)…” format. So, objectivity starts with the question itself, and the question posed does pass the objectivity test. What happened next was truly amazing. This was one of the most answered queries I have put out (and I apologize to all those who I couldn’t include in the final copy). It was completely anonymous – no professional would recommend a MyRA. The closest I came to seeing a recommendation was one fellow who explained why all the alternatives would be recommended first – and that was hardly a recommendation.

    I reported what my sources – real professionals – told me. In fact, what you see in the article represents only about 40% of the total responses. I suggest you re-read both articles. If you continue to feel there’s a bias, let me know, I’d be willing to discuss it in this format. I understand some might view any discussion of public policy as a political issue. I won’t deny that it is. Beyond that, though, the MyRA debate is really not a partisan debate, as I am sure there are professionals from both sides of the aisle that would agree that the MyRA is not necessary.

  5. Tim Wood
    Tim Wood February 05, 16:40

    Chris,

    Great article on the MyRA. I think you have to look at the actions of this administration rather than it’s words. The administration SAYS it wants to help people retire yet it proposes reductions in contributions to retirement plans. What is the only logical reason why the administration would propose reducing contributions? INCREASING TAX REVENUE.

    With IRAs already freely available to anyone whom wants one, you can open an IRA at many custodians for nothing and contribute as little as $20 bucks or so, what does the MyRA proposal solve? Access to retirement vehicles? They are heavily marketed by investment companies. Google IRA and see how many responses you receive. Anyone can get one for little or no fee.

    The MyRA proposal solves nothing. So why has it been proposed? It does not take a rocket scientist to see it is nothing more than a scheme to increase revenue to the federal government through the purchase of some type of government debt.

    The entire proposal is repugnant and insulting, a government program that is actually designed to prey upon the financial illiterate and those with modest incomes.

  6. retiremenguy
    retiremenguy February 05, 16:52

    Having re-read I would agree that your approach is not biased. And I am in agreement that I can’t find a situation where I would recommend a MyRA. Curiously enough, one of my reasons wasn’t mentioned, which is that most people don’t have the time or inclination to manage their retirement savings and should just consolidate them as much as possible and make things simple, and MyRA seems to get you on a track where you could start to have multiple buckets of retirement saving that you don’t keep track of very well. At the same time, I feel a bit sad if the comments in your article are representative of the retirement community. Quite simply, the job of a retirement professional is to provide their clientele with focused and relevant advice on questions like “should I save money for retirement” and “if I should, how should I invest”, and not only avoid bias but the appearance of bias. This isn’t always easy to do today, but it is a standard we all need to aspire to. To do otherwise is to risk discrediting not only oneself but other professionals as well. Many of the responses do meet this standard, but the last 2 clearly fail because they basically follow political buzzwords and discussion points that have very partisan meanings. Number 9 is actually pretty comical, putting Madoff into a discussion of government financing. And a couple of others don’t strike me as particularly valid or relevant in a discussion with a client or potential client but are instead a bit overly leading in nature.

  7. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author February 05, 17:13

    Thanks for taking the time to re-read the series. You have a very good reason not to recommend the MyRA. There were a lot of good reasons, but I limited myself to ten only to keep the article a reasonable length. Don’t sell #9 too short. One of our most popular articles dealt with pension plans as Ponzi Schemes. Granted, that’s a little more obvious than this, but it is also a common concern about Treasuries, although the more often quoted adage surrounding them is “greater fool theory” – but that’s basically what a Ponzi Scheme is based on. With regard to not trusting the government, check out some of the other comments on this article and in similar articles available in other publications. You’ll find it’s a common theme. Again, like I said before, just because something sounds political does not mean people don’t really feel that way and it doesn’t mean it’s not also true in some way (sorry for the double negative). But allow me let you in on a little secret: I liked the last reason because it allowed me to end the story the way I did. Again, as with most humor, it relies on an ounce of truth to make it funny.

    I appreciate your honesty and openness. I am debt to you. It’s readers like you who make our articles better and better!

  8. Macro Thinker
    Macro Thinker February 05, 18:37

    I appreciate all of the financial advisers comments but have a few issues: first and foremost, that the targeted audience of the MyRA is people who don’t, and probably never will, speak to a financial adviser. Whether they are good or bad is moot if the people who need to know about them will only ever hear about it through government influence (SOTU, political campaigns, etc). And I’m also willing to guess the MyRA targeted audience isn’t a frequent reader of your site. Sorry.
    In regards to establishing an emergency fund in a traditional bank account, that’s worse than the MyRA! I agree that an emergency fund is a great thing to have but in a bank account earning at best 0.5% interest? Why not put it in the MyRA account that you can withdraw at any time and earn 2-3% interest? Safe, slightly better returns, and the money is always available.
    To save $25/month won’t get you far in retirement but it will get you somewhere. And the people who can only afford to save $25-50/month don’t need much to live on anyway. $10,000 will go a long way to helping them live a better retirement.
    I’m an actuary so I know all about pension plans and their likeness to ponzi schemes. These days, they definitely seem more like it as contribution rates keep increasing and benefits are getting cut. MyRA is an individual account that is only paying the owner, nobody else is involved, just like an IRA which everyone seems to be recommended. If you disagree, then we need to re-evaluate our use of IRAs as well.
    Finally with regards to whether the government keeps their word about the different savings vehicles, might as well just never save because you never know when the government is going to come and take it all away.
    The one thought I certainly agree with though are the 10 scary words nobody ever wants to hear. Just frightening!

  9. Tom Mills
    Tom Mills February 05, 19:09

    I am not even close to an Obama fan, but I don’t see why “Retirement Experts” are getting their unmentionables in such a wad over the MyRA. First and foremost it is aimed at those who work for employers that don’t offer a plan. The commenters in the article who were going on about using an employers plan first (#4 and 8) seem to be missing that point. The others who say a Roth IRA would be better (#4, 5, 7 and 8), are missing the fact that while that may be true, the people this scheme is aimed at aren’t opening Roth IRAs. Not to mention the fact that once a MyRA gets big enough, it is converted to a private sector Roth IRA where it could then be invested in other options, thereby alleviating other concerns above (#2, 3, 5, 6). I could go on about the other supposed reasons in the article, but space is limited. Bottom line they don’t stand up to scrutiny.

    Whether there is some unseen ulterior motive behind the proposal is unknown. Obviously a lot of professionals think there is. Given Obama’s track record they may be right. However, their biases against everything Obama proposes are showing. I think that is what Retirementguy was referring to. I am quite certain that if some Joe showed up in the office of these professionals with $25 to invest and an additional $5 per pay, he wouldn’t be given the time of day. Why don’t we wait until this thing gets fleshed out a bit before jumping off the deep end and calling it a Ponzi scheme?

    In my opinion, this thing will die on the vine in less than 5 years mostly because the people it is aimed at will not be interested. It will give Obama and his buddies the ability to say look what we did for the little guy, and that’s about it. If he is counting on this as a new market for treasuries, he will be disappointed. Even if the best thing that happens is several thousand potential Roth IRA customers with $15,000 to invest, that should be a good thing for the professionals.

  10. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author February 05, 21:53

    Thanks ptnelson. In the process of writing this article, I was initially sympathetic to your primary argument – the target audience of MyRA doesn’t use a financial adviser. However, two things happened. First, in my research I discovered the MyRA is available to anyone earning up to $191,000. This is certainly different that my initial impression that it was only available to those earning below the poverty level. Second, the interview response was so overwhelming with regard to the lack of financial literacy – which I believe is the point you’re trying to make – that I was forced to create a series of two articles instead of the usual one. The first article deals with this issue.

    I’ll leave it to financial planners to address your other points.

    By the way, my favorite part of this article is the very end! 🙂

  11. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author February 05, 22:04

    Thanks for the comment Tom. I wouldn’t be too hard on the folks quoted in the article. If their answers seem contrite, it’s because I had to edit them down in order to make an article of reasonable length. Although, to be honest, it is a rather large intuitive leap to assume they have “biases against everything Obama proposes.” What they said really is limited to MyRA. You might get a better flavor of their comments if you read the first article in the series where many of these same professionals explain how MyRA misses the point. In the end, it sounds like your bottom-line sentiments regarding MyRA reflect theirs – and nearly everyone else in the retirement industry that I have spoke to.

  12. Charles Humphrey
    Charles Humphrey February 06, 09:28

    Chris: Thanks for provoking this wonderful discussion. It’s nice to get out the weeds and to talk about pension policy. Indeed, there is a much larger discussion to be had about whether the U.S. retirement system is working and how it might be comprehensively improved. I agree with Tom Mill’s comment that the MyRA is a political gesture not likely to find many takers. Those individuals at the upper end of eligible income range will likely have advisers steering them in a different direction. Those at the lower end and living from paycheck to paycheck will not use it. I must say though a significant and very attractive feature of the MyRA is it does not come with a multi-page prospectus. As we all know, investors read these documents word-for-word, page-by-page, and cover-to-cover. This will free them up to engage in productive economic activities and contribute billions to the economy.

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