The New MyRA – From the Department of Bad Retirement Ideas

By The Banker | Investing, Personal Finance, Taxes
18 Apr 2014
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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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7 Comments

  1. ToddR says:

    Assessment: the people who concocted this idea started by asking each other, How can we make it compulsory for everyone to buy more government debt? After a few minutes of discussion, a decision was made that First we sell it as a fancy new retirement option. When the next bear market crisis happens, we make it mandatory in order to protect Main Street from Wall Street. We need to give it a clever name, too. A big debate occurs on the nightly news, all kinds of opinion polls are conducted and blue ribbon commissions are formed, and then comes the big announcement: like it or not, you’re buying U.S. debt and you’re buying as much as Uncle Sam tells you that you’re buying. The IRS will oversee this new arrangement and anyone who calls it a “tax” will be shunned until it gets challenged by the Supreme Court, at which time, it will be called a tax but that’s OK because it will help those who aren’t able to help themselves.

    The end.

  2. ToddR says:

    Cynic? Uncle Sam hires P.R. people too, ya know. Really good ones.

  3. logosintegralis says:

    I’m slightly less cynical about this. Opening up the G fund seems to me like a “wedge issue” for lack of a better term that will eventually lead to the opening of the entire TSP to the public through MyRA’s, which will be a great boon to lots of people (1 bps expense ratio! No fees! A diversified set of funds!).

    It’s also worth noting that the G fund is not really a great deal for the government (the Treasury loses money on it: demand deposits earning 20yr interest rates is essentially a subsidy to fundholders), especially when there’s such huge demand for t-bills yielding 15bps. It really does seem like a reasonably well-intentioned stepping stone to better retirement coverage for lower-middle class workers to me.

    • The Banker says:

      Fair and good points. I don’t actually see this in particularly cynical terms.
      My biggest objection is that retirement savers IMHO need to understand that in the long run they need to be in riskier/higher-yielding assets.
      Since this only offers a low-return fixed income, MyRA savers will never get the real benefit of compound returns that other retirement savers can and should get.

  4. ToddR says:

    Among my other issues with hiring the government as one’s custodian, this will discourage intellectual engagement with one’s personal finances. It will also cloud, if not eliminate the separation between fiduciary duty and duty of care. Lastly, the custodian will have far greater leverage in resolving disputes, with regulators and the custodian drawing their income from exactly the same source. Ask yourself this, have you even considered filing a grievance against the U.S. Postal Service for not meeting performance expectations? They’re slow as molasses and this isn’t anything that anyone can do about it.

    I find too much enjoyment reading Hayek.

  5. Burt says:

    I respectfully disagree with BA (which is rare):

    1)The goal is to get people to learn to start saving for retirement, not to help people invest to get to retirement. This is clear due to the fact that there is a mandatory rollover into some other account after 15K meaning that the government isn’t trying to hang onto the investments, rather its trying to make sure that over the short 3-5yr horizon of this learning period that there are not any large drawdowns of saved money. Remember the target audience isn’t made up of investors, these are savers and the program won’t succeed if there is a large drawdown during that 3-5yr training period–that its in an effectively inflation protected fund is a bonus.

    2) I would rather the government subsidize saving than encourage speculation with the young and poor. There’s plenty of time for them to choose to invest it themselves over their careers, in the meantime this encourages them to get the same tax treatment that more sophisticated earners might get.

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