The federal government unveiled a new retirement savings plan on Wednesday to help the millions of Americans who don’t have retirement plans available through their work. The plan — dubbed myRA — is an imperfect solution that provides a needed incentive, but limited opportunity to grow your savings.
More than three in 10 non-retired people have no savings for their golden years. Part of the reason is lack of access to retirement plans. Three out of 10 working Americans don’t have a 401(k) or similar defined contribution plan through an employer. That figure rises to six out of 10 for part-time workers.
Similar to a Roth IRA, the plan was conceived as a starter retirement plan with no fees, no minimum contribution amounts and no risk of losing money. After the account reaches the maximum balance of $15,000 (or after 30 years), the money in the myRA is transferred into a private Roth IRA, where it can be invested and grown.
“It’s a horrible idea from an investing standpoint,” says Charles Sachs, principal of Private Wealth Counsel in Coral Gables, Florida. “But it’s a great gateway to get someone saving and reinforcing the habit.”
The biggest drawback is the rate of return. Those using myRA accounts don’t have any investment choices; instead, the money earns interest at the same rate as investments in the Government Securities Fund for federal employees, which has returned 3.19 percent annually over the past 10 years.
Unfortunately, that outpaced inflation by a mere 1 percent, says Mark Beaver, a financial planner at Keeler & Nadler Financial Planning and Wealth Management in Columbus, Ohio. That’s not enough. “When saving for retirement, you need a higher return,” he says.
By contrast, Roth IRAs allow individuals to invest in an array of assets with higher rates of return, such as stocks, mutual funds and bonds. That means a person can grow their money faster.
Take, for example, someone who invested $1,000 a year in the S&P 500 index during the past 10 years. With dividends, the index returned an annual average of 7.67 percent, Beaver says. That person would have made $16,268. But someone investing the same amount at the average 10-year rate offered by myRA would have made $12,861, or $3,407 less.
The lack of a minimum contribution can also backfire if the saver is overly dependent on the plan and puts in only a small amount each month. Why? Because it will take the saver a long time before he is compelled to roll the money into a Roth IRA, where he will likely earn a larger return. For instance, if a saver puts in $100 a month, it will take more than a decade before he reaches the $15,000 cap.
What myRA does is appeal to jittery, novice investors who are risk-averse. The investment is backed by the U.S. Treasury, so it can never lose value. The lack of a minimum investment, along with no fees for account opening or maintenance, allows even those on the tightest budgets to start saving for retirement, says Beaver.
It’s also more user-friendly than Roth IRAs, he says. While the rate of return isn’t spectacular, the lack of investment choices may attract people who otherwise would be intimidated by a range of options.
“Making investment choices can be very scary decisions for people to make on their own,” he says. “This is a decent option to start them off.”
The biggest benefit may be getting people to just talk about the options available to them for retirement savings beyond what their employer offers, Sachs says. Only 28.1 percent of American families have an IRA, a figure that’s fallen since 2001.
While Sachs likes the attention that the myRA is getting, he is unlikely to recommend the plan to any clients walking through his door. Instead, he would recommend investing in low-cost Roth IRAs to the same clients who may consider myRA. Sachs said Fidelity, TD Ameritrade and Charles Schwab all offer great options with minimal expense.
“They are out there,” he says. “It can be done.”