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November 10, 2015

Upside and Downside of Investing in a myRA, Uncle Sam's Newest Savings Plan

IPI expert referenced: Tom Giovanetti | In The News | Media Hit
  The Street

By Brian O'Connell

The U.S. government is back in the retirement vehicle game with this week's rollout of the new myRA savings plan

The Obama administration is quick to tout the myRA's ability to encourage reluctant retirement savers to put away money for their future -- particularly underemployed Millennials who may not have access to a 401(k) with a company match. 

"myRA is designed to remove common barriers to saving, and give people an easy way to get started," says U.S. Treasury Secretary Jacob J. Lew. "myRA has no fees, no risk of losing money and no minimum balance or contribution requirements. To make saving easier than ever, you can now put savings into my myRA directly from your bank account." 

Americans are certainly in need of a boost in financial preparedness for their golden years: the U.S. Treasury reports 31% of working Americans report having no retirement savings or pension at all. A separate 2013 from the National Institute on Retirement on Retirement Savings states the average amount of retirement savings for Americans nearing retirement was only $12,000. 

Clearly, there's a problem on the U.S. retirement savings front - but is themyRA going to be part of the solution, or part of the problem? 

To get an early look at the issue, MainStreet asked financial professionals across the fruited plains whether Uncle Sam's newest addition to the retirement savings plan line-up is a winner or not. 

"The myRA was designed to encouraged people who don't normally save for retirement to begin a habit of saving," says Chris Carosa, a retirement advisor and a contributor to Fiduciary News. "This is a very noble goal and is shared by all corporate plan sponsors and financial planners. While the relative lack of access to corporate retirement plans like 401(k) plans is a real problem -- and was originally cited as the reason for the government's self-insertion into the free market of retirement plan products -- all workers currently do have access to retirement plans and many institutions can handle automatic deduction from retirement saver accounts."

Of course the myRA plan is not without its faults. 

The cons are that the account is capped at $15,000 for lifetime contributions -- far short of what is needed to retire in comfort, of course, even with the meager growth available. 

Then, there's the serious downside of the limited investment options.

"Worse, retirement savers are forced to invest in 'risk free' government bonds that are inappropriate investments for long-term retirement savers," Carosa said.

"Since myRA accounts aren't invested in the market, their only growth is whatever paltry interest is being paid by the Treasury Department," said Tom Giovanetti, president of the Institute For Policy Innovation in Irving, Texas. "Last year, the somewhat similar federal Thrift Savings Plan paid 2.31% interest, while paying only 1.5% the previous year." 

Those cons have inspired a dissatisfied reaction that has driven some advisors to dismiss this option altogether.

"Don't bother with the myRA," said Giovanetti. "The myRA is touted as a safe, easy, affordable savings plan for workers -- it invests in only U.S. Treasury securities. The website brags about how there are no fees and no complications for employers, and that it's a Roth IRA."

For a younger worker, that can be detrimental to his porftfolio's long-term growth potential. 

"myRA is not a good option for retirement savers, even those who are just starting out," says Jason Hull, chief technology officer at myFinancialAnswers, LLC in Woodbury, N.J. "The government is playing on fear and ignorance - even on their own website, they say that myRA works best if 'you are concerned about complicated investment options and losing money.'"

And yet, the myRA is going to attract just the very folks it can most hamper. 

"This 'starter account' is likely to be used by younger investors - the ones who need to be much more heavily invested in equities than bonds so that they can take advantage of a long timeline of potential growth to beat inflation," Hull added. 

Despite the drawbacks, the plan may augur well for the future of retirement preparedness. 

"While the myRA does not solve the retirement income shortfall that exists in the U.S., it is a step in the right direction," says Jamie Hopkins, professor of retirement at The American College of Financial Services. "One of the knocks on the myRA has been that it is just redoing what can already be done in a Roth IRA. However, the ability to set up automatic payroll contributions is not easy to set up currently, and we know that millions of Americans are not saving for retirement by using Roth IRAs."

To take away some of the barriers to entry and ease consumers into retirement savers, the myRA removes the confusion of too many choices -- by limiting investment options -- and lowers the fees.

"Additionally, the myRA will bring added attention for the need to save a portion of one's paycheck," Hopkins said. "The more someone can automate their savings the better off that person will be in the long run." 

Though there is limited upside to the myRA because Treasury bonds have not been beating inflation, the low contribution amount can be just the ticket to get people in the habit of saving for retirement without having fees erode their portfolio. 

"On the upside, there aren't any fees and the minimum initial investment can be as low as $5," says Levar Haffoney, CEO at Fayohne Advisors in New York City.  

Even myRA naysayers relent, noting this retirement initiative can at least attract more retirement savers. 

"The only reason this would be a good retirement account for someone is if they need a payroll deduction to force themselves to start saving and they work for a small employer that doesn't offer another retirement account," said Hull of myFinancialAnswers. "Otherwise, investors would be much better off putting the same money in a Roth IRA." 

As the above statements demonstrate, there's a wide range of opinions on Uncle Sam's new myRA savings plan. To get the best grip on the issue, discuss the pros and cons with your financial advisor before taking any action. For more information about myRA and to sign up for an account, clickhere.


 

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