Is myRA myRedundant?
The federal government recently relaunched its own retirement savings product called the myRA. Many may have remembered its first “launch” from earlier this year. It fell flat. The administration is now calling that the “beta test.” It’s not clear what prompted the “relaunch,” but it came on the heels of a new budget that saw the repeal of a popular loophole in Social Security. Could the “new” nation-wide launch of myRA served as a deflection of the growing criticism of the budget?
Of interest, the myRA – whatever version you count – is not the first foray of the Obama White House. “President Obama first began this effort by introducing a payroll-deducted, auto-enrolled IRA program in 2010 for employees without access to workplace retirement savings,” says Kate Crowther, Director of Government Relations at Ubiquity Retirement + Savings in San Francisco, California. “The program was compulsory for employers, but employees had the option to opt-out if they so choose. All employers with 10 or more employees would be required to participate and make this savings option available to their employees by simply creating one small additional step to the payroll process. Despite bi-partisan support, and a campaign effort by Vice President Biden, the program gained little traction and was not able to be implemented.”
Since that time there has been a vigorous effort to promote the sense of a “retirement crisis.” With one of the nation’s deepest post-WWII recessions and an uncharacteristically slow recovery, it’s not difficult to find statistical data to support that contention. “According to the Government Accounting Office (GAO),” says Bob Johnson, President & CEO of The American College located in Bryn Mawr, Pennsylvania, “approximately 29% of all households age 55 and older have neither retirement savings nor a pension. And, according to the National Institute of Retirement Security (NIRI), the median retirement account balance is only $12,000 for near-retirement households.”
In addition to these numbers, we see compelling evidence regarding the lack of access to company sponsored retirement plans. Pete Swisher, Senior Vice President, National Sales, at Pentegra Retirement Services in White Plains, New York, says, “The retirement plan coverage gap, which includes the large number of very small businesses that do not offer a workplace retirement plan, thereby making a workplace retirement plan unavailable to roughly 68,000,000 workers.”
While Christopher V. Kimball, Owner, Christopher V. Kimball Financial Services LLC, Lakewood, Washington, believes “the government is concerned about the pathetic level of savings by working Americans,” he offers a more cynical view as to why Washington has decided to relaunch the myRA. He says “the government knows there’s no way it can provide retirement benefits for millions of retirees, so pushing the responsibility on the workers is the only choice.”
Given the stated reasons for creating myRAs, they do seem to offer some apparent advantages. “It’s free, it’s easy (relatively), and it’s guaranteed by the Government,” says Kimball.
Johnson says the MyRA “is aimed at low and middle income Americans who don’t have access to employer sponsored retirement plans. The accounts will be invested solely in US government savings bonds. They will be backed by the US government meaning that savers can never lose their principal investment.”
“The advantages of myRA is that individuals, with a minimum balance of $25 and minimum contributions of $5 per paycheck, are able to begin saving,” says Crowther. “One of the greatest hurdles for individuals, even with access to workplace savings, is establishing the habit of saving. Everyone knows that saving is important, we all agree on that. Everyone would like to look forward to a dignified and secure retirement; this is a core tenet of our country’s belief system and the ‘American Dream.’ Without much effort, a myRA account can be set up and that very first step on the path to savings is taken. Additionally, assets are protected and will not ever be worth less than what has been contributed.”
Indeed, this has been the myRA’s main selling point. “It is basically a Roth IRA with no fees but no investment options,” says Pedro M. Silva, a financial advisor at Provo Financial Services Inc. in Shrewsbury, Massachusetts. “Government guarantees are great, but investments are so conservative that they will not be enough to solve the ‘problem’.”
This, in fact, may be viewed as the Achilles ’ heel of the myRA. Johnson says, “The problem is that you can’t build wealth for retirement by investing in assets that simply keep pace with inflation. True investing involves sacrificing purchasing power today for increased purchasing power in the future. This plan simply allows people to maintain purchasing power. This MyRA plan will not do much to close the huge retirement income gap that exists for many Americans. We need to encourage Americans to invest more in equity securities. When you have a long time horizon that is a much better vehicle to accumulate true wealth.”
In the end, myRA’s numbers just don’t add up. Kimball says, “There’s only one investment option which over the last 10 years has only returned a little over 3%, the maximum value allowed for each myRA account is $15,000 (then it needs to be rolled into a ROTH IRA), it has the same contribution limits as ROTH IRAs so there is no advantage over a regular ROTH IRA in how much money an individual can contribute.”
The inappropriateness of the single investment option calls into question whether myRA is violating a fiduciary duty to the target investors. “I hate to be a cynic,” says Silva, “but this looks like a way to get more people to buy Government Bonds and solve a non-existent problem. Any one of these folks can do a Roth IRA with minimal fees. It is fully portable and will have much more appropriate investments than Government Bonds. The idea of a 20 or 30 something investing 100% into Government Bonds when suggested by advisor would be malpractice, when done by the government, it is cheered.”
Proponents of myRA claim it offers a savings vehicle not currently being offered in the free market. But is that true? Jaime J. Raskulinecz, CEO & Founder of Next Generation Trust Services in Roseland, New Jersey, says, “Any institution that offers a Roth IRA would be more advantageous as there are more investment options available to the contributor.”
[For readers who have to work the day after Thanksgiving (Friday, November 27, 2015) should check into FiduciaryNews.com for a special “Exclusive Interview” detailing one popular firm that offers something very similar to a myRA (and has been for some time).]
This calls into question the sustainability of the myRA. Raskulinecz says, “I can’t imagine that the myRA will be well received or well used by Americans. If they’re not now taking advantage of Roth IRAs, which are basically the same but with more investment options, I don’t see the draw to the myRA.”
Not everyone sees it this way, though. “The myRA program is a government program and will carry with it the stigma of being a government-run program,” Crowther says. “This sentiment is not shared by all, but there will always be resistance whenever the government treads into territory seen as competing with the free market. In regards to myRA, I would not say that that is a fair response and I am not concerned about the free market’s ability to compete with the myRA. The myRA is not likely to have an impact on the market, nor elicit a strong response or shift of focus. The state-sponsored programs will create the impetus for change within the market.”
Many, though, see this effort as misplaced. “The reason the coverage gap exists is not because there is a lack of a government solution; it exists because there is a highly predictable lack of demand that can only be filled by a mandate,” says Swisher. “If there is a role for government here, it is to spur the demand if our society is ready for that sort of a step. Another key element of the equation, which governments, not surprisingly, are not quick to grasp, is the need for distribution. There is no program that can be made simple enough to distribute itself. The reason we have 700,000 retirement plans filing IRS Form 5500 each year is because of the army of financial advisors who distributed them over the decades. The coverage gap will prove hard to close without an army of advisors to help explain the options and make them work.”
This “lack of distribution” idea represents a real-world sense policy makers seem to lack. Johnson says, “When people get ill they go to a doctor for help; when people get into a legal bind they seek the counsel of a lawyer; somehow when people are trying to figure out the best financial course of action, they believe they can do it themselves. Relying on the government to give financial advice is problematic. People should establish a relationship with a qualified financial advisor.”
Time will tell if the myRA survives or ends up going the way of Obama’s 2010 failed effort. Many agree with Kimball’s prediction regarding the myRA. He says, “I think the market will respond will a deafening silence.”
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