The End of MyRA

myra_retirementAt the end of July the Trump administration quietly killed a retirement program called MyRA , intended to help lower and middle-income people begin investing for retirement.

Good riddance.

If you are of a certain political cast of mind, you might see the end of the MyRA as another hit job by Wall Street and Big Business against the little guy, just struggling to get started.

That’s not the way I see MyRA’s demise. The real reason this program stunk was the limitation that MyRA holders had to exclusively buy US government bonds, which are simply a terrible asset for retirement investing.

The Obama administration created the MyRA in 2014 to provide starter retirement accounts for workers without access to a 401(k)-style plan. The impulse behind the program, and some design elements of the MyRA, weren’t bad.

MyRA was free to both workers and business owners (yay!), encouraged automated contributions through payroll deductions (yay!), could be opened for contributions of as little as $5 per month (yay!) and simplified investing by putting all money into a special US government Thrift Savings Plan known as the G-Fund (boo!).

The G-Fund is government-guaranteed, so participants in the MyRA would never lose money, although investment returns would remain a blend of government bond interest rates, recently around 2% per year.

Anyone affected by the MyRA discontinuance will now need to roll over their funds to a Roth IRA account, although in reality very few people will be affected. Only approximately 30,000 accounts were opened since 2014, with a mere $34 million overall.

The reported $10 million a year it would cost to run it – the stated reason why the Trump Administration ended the MyRA – wasn’t that much either.  The reason to end the program, in my mind, wasn’t the cost of the program or the impulse, but rather a huge design flaw – namely that all participants could only buy government debt.

If I were paranoid about the creation of the MyRA (hint: I’m not paranoid) I could connect the dots of the MyRA rules as an insidious Obama administration plot to force poor people to buy government bonds in order to finance our excessive national debt. That was a hot take among a certain type of political mind at the time of MyRA’s creation. It isn’t the real reason this program stunk.

Let me connect the dots in a different way that gets to the heart of the bad design of the MyRA. If you invest for retirement, you by definition invest for the longest run. You invest for your remaining lifetime, or even beyond. At the very least, you invest many decades into your future. As I’ve written many times before and will continue to write until my little fingers get too sore and arthritic for more writing, long-run investing needs to be dedicated to risky assets with a potential for higher returns.

Unless you are already very wealthy and are in a pure wealth-preservation mode (maybe 1 percent of you) retirement investing specifically needs to skew heavily toward higher-return assets. Riskier assets. Like stocks. (fine print: diversified, hopefully indexed, or at least low-cost, mutual funds. But I digress.) Poor people and people just starting to invest – the specific targets of the MyRA program – cannot afford to buy only US government bonds in their retirement account. Their retirement money can’t grow enough with government bonds. That design flaw just killed me. By limiting the returns that MyRA investors could obtain, the design condemned investors to a terrible retirement account that undermined the whole point of long-term compound interest growth.

Let’s do a simple compound growth comparison between a worker making a one time retirement investment for thirty years earning a US government bond return – like 2 percent per year – versus a long-term moderate stock-like growth – like 6 percent per year. That mere 4 percent difference in annual returns will result in 3.7 times more money, thirty years later, for the stock investor. It’s likely the difference between having enough and not having enough in retirement.

I think I know why the Obama administration did it, which was to prevent nominal investment losses for people just starting out. But a bad design does not justify good intentions. MyRA, by forcing its customers to purchase government bonds only, marginalized retirement investing for a group that was already marginalized.

Now that the MyRA is dead, which is fine, we’re still stuck with the policy problem that the MyRA attempted to address.

Namely, the great challenge in finance is encouraging people with limited income and financial knowledge to start savings and investment. How do people who haven’t invested before even get started?

This unsolved problem really explains the lack of uptake for President George W. Bush’s proposal to shift the responsibility for retirement savings from Social Security to individual investment accounts, later (mis-)labeled as “privatizing Social Security.”

If you leave poor or financially unsophisticated people in charge of their own personal retirement, and they fail to save enough, ripping Social Security away leaves Grandma in a cruel spot in her old age.

In the decade since that Bush-era idea ignominiously died, fin-tech companies like Qapital, Acorns, Betterment, and Wealthfront have begun to chip away at this unsolved problem, by radical simplification of the savings and investment process, and by making automated contributions easy to set up via a mobile phone app. Still, they haven’t solved the public policy problem that most people do not save enough and most people who haven’t yet saved enough don’t even know where to begin.

The MyRA was, in that sense, a noble attempt at addressing a tough problem. But limiting the investment options to government bonds – in a horrifically low interest rate environment no less – meant that it would only do a disservice to the people it purported to help.

 

A version of this ran in the San Antonio Express News and Houston Chronicle.

Please see related posts:

100% Risky Even In Retirement?

MyRA – A Dumb Idea From the Start

Check out this Acorns Thing

Automated Savings with Qapital

How To Invest

 

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The New MyRA – From the Department of Bad Retirement Ideas

The federal government – following an idea proposed during Obama’s January 2014 State of the Union address – will role out a new simplified IRA plan later this year, designed as a starter retirement account, known by the catchy name MyRA.

MYRA

Geared to lower- and middle-income earners, the accounts will have the following features:

1. Automatic deduction of contributions from payroll (that’s a good thing).

2. Same income limits, contribution limits and tax treatment as the Roth IRA – post-tax contribution, $5,500 total per year, $129,000 income per individual (that’s fine).

3. A maximum size of $15,000 total before investors need to roll it over to a private IRA (that seems arbitrary).

4. A single investment option, in a variable-rate “G Fund,” that matches the Thrift Savings Plan Government Securities Investment Fund. (that’s a terrible idea).

Why that’s a terrible idea

I understand the federal government designed the MyRA to solve a set of identified problems, explained in this White House Press Office blog post.

First, one half of all Americans have zero retirement savings.

Second, half of all full-time workers have no access to an employer-sponsored retirement plan (like a 401K or 403b), and that number climbs to 75% for part-time workers.

Third, lots of people who had retirement accounts invested in public markets lost money in the last financial crisis.

These are all admirable problems to tackle, although the existing IRA accounts are already available to anyone not covered by an employer’s plan.

Will the MyRA actually force small business owners to enroll employees?

The most interesting innovation appears to be the automatic enrollment by employers and automatic deduction of employee paychecks feature of MyRAs, although I can already hear the cries of “Nanny State” and “Government Don’t Tell Me How To Run My Small Business Or How To Save Money.”

Obama_money
Not one of his best ideas

I cannot tell from the White House memo how coercive the MyRA enrollment will be. Does every small business have to enroll their employees if they don’t offer a retirement account? I just can’t believe the current Congress would pass anything that resembles coercion against small businesses. So my guess is that this MyRA becomes an optional program, and this most innovative part of the MyRA program disappears.

What remains after Congress eliminates automatic enrollment, however, is a disservice to lower- and middle- income employees.

Without automatic enrollment, the MyRA seems to address the first two problems – zero savings and zero employer-sponsored retirement plans – by creating an account with tremendously similar features as the existing Roth IRA plans, but with one terrible feature.

The terrible feature

Your only option is to invest in US government debt.

The interest rate will vary over time according to prevailing interest rates, but, by design, this will be most secure dollar-denominated investment available, and therefore the lowest yielding.

The current 1 year rate offered by the “G Fund” is 1.89%. After inflation, the return on your money in a MyRA is close to zero.

Although the G Fund rate – and therefore your expected return – will go up or down with changing interest rates over time, the way the income yield on US government debt works is that it will only ever barely exceed the rate of inflation over time, almost by definition, as a result of market forces.

The fact that your income will be available upon retirement ‘tax-free’ like a Roth IRA is close to meaningless, since there will be hardly any income to enjoy, tax-free.

This is unacceptable as a product for retirement savings, and unacceptable to market as a vehicle for lower- and middle-income employees, who badly need the benefit of higher compound returns, even more than other retirees.

The memo describing the MyRA boasts that MyRA investors may rest assured that they cannot lose their principal. They can be confident that their retirement savings will not be subject to the kind of volatility that we’ve seen in recent years.

What the memo does not spell out, but that make the MyRA troubling, are the following key ideas about retirement investing:

1. Over longer time horizons – say between 5 years (70% of the time) to 15 years (95% of the time) to 20 years (99.5% of the time) – stocks win.  The volatility of the stock market ceases to be a risk when compared to investing in bonds. This is because despite the volatility of stocks in the short run, stocks always offer a superior return in the long run. Retirement savings – the most long-run investing that individuals  do – must skew toward higher-risk, higher-return products like stocks, and away from bonds [For more on this idea, see this post on “100% equities for the long run.”]

2. The long-run risk of investing in bonds in a retirement account is the terrible loss of purchasing power due to inflation, as well as the missed opportunity of long-term wealth accumulation from higher-risk, higher return investments.

In sum, if the MyRA only lets investors earn the “G Fund” rate of return, it’s totally unsuited for anybody’s retirement account.

An even more cynical view

Now let’s apply a paranoid Wall Street skeptic’s eye for a moment.

I do not believe the Obama administration has an evil master plan here.

They are not proposing to automatically deduct a portion of salaries from poorly paid, unsophisticated folks with no other retirement money and thereby extract the limited savings of the country’s underclass to fund the nation’s debt, at a good-for-the-government-but-bad-for-the-poor long-term interest rate. I don’t believe that comes from a Dr. Evil plot deep inside the Treasury Department.

On the other hand, that would be the actual result of this MyRA plan.

One man’s investment is another man’s debt

What is obvious to Wall Street folks but less obvious to Main Street folks is that the bonds we buy for investment are the borrowing mechanism of the companies and governments who issue bonds.  My bond investment = the (company/government) bond issuer’s borrowing.

When I earn a 3% return on a Coca Cola bond over ten years, that just means Coca Cola borrowed money from me at a 3% interest rate for ten years. When you buy a municipal water company bond at 4%, that just means the municipal water company took out a loan at 4% from lenders.

When the US Government offers a 1.89% “G Fund” return to lower-income workers in a MyRA, that also means the US Government borrows money from its lower-income workers at 1.89%. Which, while not intended as such, creates an evil result.

Dr_Evil_one_Million_dollars
I will offer you 1.89% on your One. Million. Dollars.

While it’s not an evil plot, it is a terrible plan.

To encourage lower-income (and presumably less-sophisticated) workers to earn a paltry 1.89% return on their longest-term investment is unconscionable retirement planning for the nation’s poorest, that just happens to, simultaneously, fund US government debt at a cheap interest rate.

 

Please see related posts on the IRA account investing:

The Humble IRA

IRAs don’t matter to high income people

A rebuttal: The curious case of Mitt Romney

The magical Roth IRA and inter-generational wealth transfer

The 2012 IRA Contribution Infographic

The DIY Movement and the IRA

Angel Investing and the IRA

 

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