While President Obama’s newly proposed “starter” retirement savings accounts are sure to come under heavy scrutiny from “both sides of the fence”, the goal stated in the January State of the Union address, is to provide millions of middle class Americans with a means to save for retirement. The agenda is particularly designed to serve individuals whose employers do not provide access to an employer sponsored retirement plan.
Sure, promoting positive behavior for individuals and their retirement saving habits is positive and can often be argued as necessary, the new “myRA” agenda seems to be leaving more questions than answers for potential investors during the programs infantile stages.
Who will be eligible to open and contribute to the account?
FACT: Any individual who earns up to $129K and couples who earn up to $191K and whose employers choose to make the myRA available through their workplace.
However: there is currently no discussion of requiring companies to offer the myRA! Will the introduction of myRA’s all of a sudden change the minds of employers who’ve already chosen not to offer a retirement plan previously?
How will the account be structured & how is the money invested?
FACT: The myRA will be structured similar to a Roth IRA i.e., funded with after-tax dollars (rather than with a pre-tax deduction). Contributions will be solely invested in government savings bonds – this means they will never lose their principal investment.
However: the tradeoff is little upside growth potential e.g., in the current interest rate environment, earning less than 2%. While low returns are better than no returns, and avoiding market risk is a comfort to users, they are subjected to much less tangible, but very serious, other forms of risk – namely inflationary & longevity risks!
How much can an individual contribute?
FACT: The minimum initial contribution can be as little as $25, with subsequent payroll deductions of $5 on an ongoing basis. The annual maximum contribution, as with other types of IRA’s, is $5,500 ($6,500 if 50+)
However: the program maximum is only a mere $15K! (Once the myRA balance exceeds $15K they’ll be forced to roll it over to a private-sector IRA)
In summary: the myRA program is certainly a step in the right direction – and any step (even small ones) to alleviate the U.S. retirement crisis is a good thing, however, it is delusional to believe that this is the “end all” of the U.S. retirement crisis – put simply: the myRA is not a silver bullet.
And the biggest thing that the myRA won’t change: the U.S. is a consumer nation, fast to spend, and slow to save. The 401(k) industry has spent significant amounts of money to try to change this – with only limited success. Will the introduction of the myRA change this culture? Unfortunately, not likely…
Author: Ken Dawson, Investment & Retirement Service Coordinator