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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Ask An Ex-Banker: 100% Equities Even In Retirement?

retirementHi Michael,

I enjoy and look forward to your advice every week. I am about to do as you (and a lot of other smart people) recommend and move our investments to several diversified equity index funds. My question: would you still suggest no index bond funds for someone in our age bracket? I am 71, and my wife is 65. We have a comfortable railroad pension and this year I started my Required Minimum Distribution (RMD.)  We have modest money to transfer ($145,000) from Morgan Stanley to I was thinking Vanguard.

–Bob in San Antonio

Thanks, Bob for your question, which refers to my recent exhortation that 95% of people should have 95% of their money invested 95% of the time in diversified 100% equity index funds, and never sell.

The quick answer to your question is yes.

I still would give you the same advice, although with a few caveats. The first caveat of course is that this advice is free, and you get what you pay for!

Also, I don’t know your full situation so I’ll make base-case scenario assumptions and you can fill in the details. The key to the choice to remain 100% in equities (instead of bonds or some other fixed income) is your time horizon. Above a 5-year time horizon (my minimum for ‘investing’) then people should be in diversified equities rather than ‘safe’ bonds or savings.

Now, you are 71 and your wife is 65, which puts your expected remaining lives (according to this Social Security actuarial table) at 13.4 and 20.2 years respectively. Given the way probabilities work, you should want to maximize your investment account for 20 years or longer, at least to support your wife (who is likely to outlive you). If you have heirs, your time horizon will be longer than even 20 years, and might really be measured in many decades.

required-minimum-distribution table
Divide retirement assets by the divisor to calculate RMD

I’m assuming all along that you will not have to sell the funds in your account, and you won’t be spooked by market volatility, which can and will be substantial over the next 20 years. At the worst moments, sometime in the next 20 years, risky assets like stocks could lose 40% of their value from their peak, the sky will look like its falling (it won’t be), and you have to know yourself well enough to know whether you could stomach that kind of volatility without selling.

Pensions & Social Security act like a bond anyway

Another factor specific to your situation that makes 100% equities even more acceptably prudent is that your railroad pension looks and smells and acts like a bond. Meaning, it probably pays the same amount every year without any volatility, or maybe it adjust slightly upward for cost of living changes. Social Security works the same way. The fact that a huge portion of your income is fixed income and bond-like and safe and snug should make you even more comfortable with the idea that you can remain exposed to volatile equities.

Without your pension & social security – If you had only your equity portfolio to cover your expenses – you might be forced to sell some equities to cover your costs at an inopportune time, and then 100% equities would be less of a slam dunk.

Adjust for RMD?

Speaking of selling, the RMD could change your decision (and my advice) slightly.

You know you’ll have to withdraw some required minimum distribution (RMD) each year, based on the IRS rules and your expected lifespan. A reasonable case could be made that you should keep at least one year’s RMD in cash, since you know your time horizon on that amount of money is very short. Many reasonable people might advocate a few years’ RMD in cash for the same reason.

I think its just as reasonable, however, to decide instead to keep the account fully invested in 100% equities, betting that equities will outperform bonds more years than not, and that your twenty year time horizon still justifies the decision.

asset_allocation
I totally disagree with this suggested asset allocation

The deciding factor between these reasonable scenarios, in my mind, is how ‘comfortable’ the ‘comfortable railroad pension’ really is. If your lifestyle costs are fully covered by the pension, and the retirement account subject to RMD rules is just extra money, then you can think of that investment account as intergenerational money. If you have heirs or a favorite philanthropy to pass money to, for example, then the time horizon for your account can be measured in decades, and you should undoubtedly stay 100% in equities. I’m confident that with a 20 year time horizon or greater, there will be more money in the end via equities than there would be if you invested in bonds.

With plenty of interim volatility, of course.

Good luck!

Michael

 

Please see related posts:

Hey Fiduciaries: Is It All Financially Unsustainable?

Stocks vs. Bonds – the probabilistic answer

 

 

 

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A Confusing Puzzle Made Simple – Retirement Plans

A version of this post ran earlier in the San Antonio Express News

paradox_of_choice

I recently received in the mail retirement plan documents for a local employer’s 403B plan.

I’m going to spend the first part of this column complaining about this 403B plan provider. Later, I am going to offer a better, simpler, version of the plan. And that better, simpler, version of the plan will make 99.5% of all investment advisors throw up in their mouth. But they are wrong and I am right.

But before I complain

Let me start with an important public service announcement first:

403B plans and 401K plans – employee-sponsored, tax-advantaged retirement accounts for non-profit and for-profit employers respectively – are Totally. Freaking. Awesome.

If you have access to one of these through your job, and you are not taking full advantage of these accounts, then drop your newspaper or iPad right now – seriously, right now – and call your HR department and sign up for automatic payroll-deduction investing.

Do it. I’ll still be here when you get back.

What are you waiting for? I said I’ll be right here.

Go!

Ok. Are we good?

Now then, my complaining

I received in the mail this packet entitled “important information about your retirement plan,” consisting of 42 pages, printed on double-sided paper and in small letters. You might be able to guess where this is going.

The problem

I’m bothered not by any deficiencies in the plan, but rather, the opposite. The document provides a gold-plated menu of options.

The problem is that anybody except a sophisticated financial professional would find the choices totally overwhelming.

I did some simple addition and this is what I found:

141 mutual funds of 100% stocks;

38 mutual funds of 100% bonds;

41 mutual funds with a blend of stocks and bonds, in varying proportions;

6 money market mutual funds; (By the way, this is perhaps the most ridiculous part of the whole list.  A money market fund is a money market fund is a money market fund. You don’t need 6 to choose from.)

6 fixed return investments;

1 lifetime annuity investment;

And a partridge in a pear tree.

Hello? Is anybody there? This makes me so mad.

Paradox of Choice

These choices make no sense. You would think the designers of this 403B plan had never heard of the behavioral finance theory known as the ‘paradox of choice’ idea in retirement planning.

too_many_choices

Behavioral economists have shown that the more mutual funds you offer, the less likely people are to actually invest in anything. We tend to choose instead to delay decision-making to some later date. And that delay, in the case retirement planning, is a horrible outcome.

An economist’s study using data from fund company Vanguard showed that for every additional 10 mutual funds offered in a retirement plan, the rate of employee participation in the 401K and 403B programs declined 2%.

If you offer 50 additional funds for example, we would expect 10% fewer employees on average to participate in their retirement account.

The decision – due to confusion – to defer contributing to some far-off future date may cost you millions of dollars in your retirement. I’m sure the friendly folks in charge of designing this 403B plan felt good about offering so many choices because, hey, more choices are better, right?

Unfortunately, not when it comes to encouraging people to invest in their retirement accounts.

My solution, as DRAGO

Sometime in 2035, when I am elevated by President Miley Cyrus to the post of Dictator of Retirement Account Great Options (You can just call me DRAGO, for short) there will be two – and only two! – funds to choose from.

miley_cyrus_patriotic
Miley Cyrus is a Patriot

In this way I will maximize your participation.

Risky and Not Risky

I will call these two funds Not Risky, and Risky.

Not Risky will never lose you money. Not Risky will provide you between 0 and 2% positive annual returns year in and year out. It will also never make you any money on your money, especially after taxes and inflation.

If you have 10 years or more until your retirement (a key ‘if!’) Not Risky is totally forbidden for your retirement account.

Risky, by contrast, is quite volatile. You can lose as much as 30% of your investment in one year. You can also gain as much as 30% in one year. Viewed over long periods of time, Risky has returned about 9% per year in the last century. Risky is also the only way to actually grow long-term wealth with your retirement account.

In the future with Risky, you should reasonably expect no more than 6% annual returns, over the long run, with tremendous volatility in the short and medium run.

But after taxes and inflation, Risky offers you a far better return on your money than Not Risky, many, many times over.

Finally, as your DRAGO, if you have more than 10 years to go until your retirement account (a key ‘if!’), I will force you to only have Risky in your portfolio.

Retirement money for most of us, remember, is long-term money. For most workers in their 20s, 30s, 40s, and 50s, retirement is more than 10 years away.

Only if you plan to retire within the next ten years (a key ‘if!’), will DRAGO allow you to invest in a blend of Risky and Not Risky.

In this way, I will maximize your wealth in retirement.

You can thank your DRAGO, as well as President Cyrus, for this important service and improvement in your quality of life in your retirement years.

 

 

please read related posts:

Stocks v Bonds, the Probabilistic Answer

Book Review of Simple Wealth, Inevitable Wealth by Nick Murray

 

 

 

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