President Obama says the starter savings plan he unveiled in his State of the Union address—awkwardly named myRA—“guarantees a decent return with no risk of losing what you put in.” He’s right about the protection against losses. But it’s not as clear whether the myRA offers a “decent return.”
The myRA savings account is intended for the roughly half of U.S. workers who don’t have access to employer-sponsored retirement plans. It’s a government-run account that will earn the same fluctuating interest rate as the Thrift Savings Plan Government Securities Investment Fund available to federal employees. Contributions, which will be deducted from after-tax pay, won’t be taxed on withdrawal. The purpose is to get people started on a lifetime of savings. Once an account reaches $15,000 it will be rolled over into a private-sector Roth IRA. The myRA plan is so new that some people in Washington are still pronouncing it like the woman’s name. It’s actually three syllables, a play on “I-R-A.”
A path to riches it’s not. If it had existed in 2012 it would have produced a return of 1.47 percent, going by what the Thrift Savings Plan earned that year. Standard & Poor’s 500-stock index funds returned 16 percent in 2012. The 1.47 percent return wasn’t even enough to keep up with inflation, which was 1.8 percent that year. “A decent return is a rate of return that exceeds the rate of inflation,” says Lance Roberts, chief economist and chief executive officer of STA Wealth Management in Houston, which manages $650 million in client assets, mostly for retirement.
Long-term returns are a bit more impressive. From its inception in 1987 through 2012, the Thrift Savings Plan’s so-called G Fund earned 316 percent, well above inflation of 106 percent over the same period. But as STA’s Roberts notes, interest rates were falling throughout that time, boosting fixed-income funds such as the G Fund. From here on out, rates are likely to go the other way.
Many of the workers for whom the myRA was designed live paycheck to paycheck, so they need a strong inducement to set anything aside for the future. The myRA’s modest returns may not be enough to get them to refrain from spending the few extra dollars they have. David Certner, AARP’s legislative policy director, supports the myRA but acknowledges, “I don’t think you’re going to get tens of millions of people to flock to this thing.”
The plan has several good features. The initial investment can be as small as $25, contributions can be as small as $5 per paycheck, and there are no administrative fees for account owners. (The government picks up that tab.) At many private funds, fees on small accounts can be enough to wipe out returns. The guarantee against loss of principal should induce some nervous types to join. Investors can borrow from their balances, albeit with a penalty. As low as the return is, it’s actually set artificially high by the government, which pays investors the average return on long-term Treasury bonds. “It seems to me like it’s a small step in the right direction,” says William Gale, a senior fellow at the Brookings Institution. Still, he adds, “It’s not going to change us from a nation of spenders to a nation of savers.”
The idea behind the myRA has kicked around Washington under the name of R-Bonds—“R” for retirement. The main force behind the idea is J. Mark Iwry, the U.S. Treasury Department’s deputy assistant secretary for retirement and health policy. In the past, Iwry has described R-Bonds as “training wheels” to help new savers get accustomed to setting money aside on a regular basis. “Mark Iwry has talked about this idea for years,” says Gale. “His thoughts are all over this.”
Obama is creating the myRA by executive order. What he can’t do is force employers to offer it. That’s why he’s asking Congress for a bill requiring employers that don’t provide a savings plan to connect their employees with automatic-enrollment IRAs. The myRA would presumably be one of the options. Workers who don’t want to participate in an automatic-enrollment IRA could opt out, but experience shows that most don’t. The bill would defray the administrative costs of payroll deductions for small businesses.
There’s certainly a need for a plan that gets nonsavers to start building nest eggs. A 2012 paper by economist James Poterba of the Massachusetts Institute of Technology and others found that about 46 percent of American senior citizens have less than $10,000 in financial assets when they die. Most of those depend on Social Security as their only formal means of support. But as Obama said in his State of the Union speech, “A Social Security check often isn’t enough on its own.”
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- Thrift Savings Plan
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