What’s a myRA?

In his SOTU (State of the Union) address Tuesday evening, President Barack Obama announced what he billed as a new retirement savings plan for low and middle-income wage earners.  He calls it “myRA.”  (Whoever came up with that moniker?) 

 

Highlights:  The President has directed the U.S. Treasury to create this government-backed retirement account.  It will be administered by a private-sector money manager.  There will be no fees for depositors of this new savings plan.

 

However, since money management firms don’t work pro bono, Uncle Sam is likely to pick up the tab for the firm that Treasury chooses to administer the plan.

A pilot program will go into effect by the end of 2014.  All workers will be eligible to set up a myRA, even employees who currently are participating in a 401K plan, so long as their household income does not exceed $191,000 per year. (Is this considered low-income?)

Savers may begin with a deposit of as low as $25 and make monthly contributions as small as $5 through payroll deductions.  They will be limited to yearly deposits of no greater than $5,500 per year.  Total plan contributions will be capped at $15,000.

 

Shortcomings and Benefits. The financial instruments which are behind this idea are solid.  Savers’ money will be guaranteed by the full faith and credit of the U.S. Government.  Proceeds will be invested only in U.S. Treasury obligations.

But returns for myRa accounts are modeled upon the Thrift Savings Plan offered to federal workers.  That fund earned in the vicinity of a mere 1.5% last year.  This is spot-on with the return of five-year treasuries which are currently yielding around 159 basis points (1.59%).

  

Returns are very low and not diversified. Furthermore, when the plan maximum of $15,000 is reached, it must be rolled over into a privately managed IRA account.  (Why the mandated rollover?)

There is more, but those are the basics.

 

The fact that the plan has guaranteed, but low returns; is capped to an amount that is totally insufficient for retirement planning; and that it requires the myRA account to be rolled over into a private IRA when it reaches its $15,000 maximum makes it a questionable fiduciary experiment.

If the administration and its advisors really think this is a good idea, why jump through hoops?

 

Instead, just permit low wage earners to set up their own private IRA for which, like Obama’s proposal, the feds pick up the management fees, and which is funded and guaranteed by the U.S. Government up to the same maximum.

Keep it simple, or don’t do it.

Thanks for reading.  Enjoy Sunday's game!