Why Obama’s myRA plan is a cherry Life Saver | Chuck Jaffe
All that Americans have needed to achieve most of President Obama’s goals with his new retirement savings program — without his assistance — was a mutual fund with a low minimum initial investment.
There are a few problems with President Obama’s new retirement savings program, the myRA, but the biggest one may be that Americans have been able for years to get nearly everything it offers but haven’t been doing it.
All they needed to achieve most of Obama’s goals without his assistance was a mutual fund with a low minimum initial investment.
It’s not a perfect comparison — there are definitely places where the myRA will have advantages and others where funds could have an edge — but the bigger point is that you don’t necessarily need to put more utensils in the toolbox when investors haven’t been using what’s in there anyway.
To see how fund investors can achieve the results of the myRA without actually ever enrolling, let’s look at the president’s new initiative.
The myRA is a savings vehicle designed to serve people whose employers don’t provide access to a retirement plan. That’s about half of all workers, mostly the ones who work for small employers that can’t afford to put a program in place.
The myRAs will be backed by a security that looks and feels like a savings bond, is backed by the government and with the same variable-interest-rate return offered by the G Fund, the Government Securities Investment Fund in the federal employees’ Thrift Savings Plan.
Savers — who will be able to open accounts for as little as $25 and make additional contributions in amounts as small as $5 — would be guaranteed that the value of their account would never go down; they would pay no fees on the accounts.
The myRA uses after-tax dollars, like a Roth IRA (meaning withdrawals under most circumstances will not be taxed). And while it is funded by paycheck deductions, savers will be able to keep their accounts when they change jobs.
Workers who have access to a qualified retirement plan won’t be tempted much by the myRA, and employers who do not offer a plan will not be required to sign up for the new initiative.
There also are plenty of drawbacks to the myRA plan, most notably the required investment in the G Fund — woefully conservative for a young worker with decades before retirement — to the $15,000 limit (after which, the money is rolled into a Roth IRA).
Now let’s look at simply using mutual funds to do the job.
For starters, there is the option to simply open a Roth IRA instead of the myRA. It’s a wash on after-tax money and tax treatment (especially because the myRA converts to a Roth when it gets big enough).
While the myRA has an edge because there are no fees, the Roth IRA has a major advantage in flexibility, and the ability to choose investments, to be more aggressive with the long time horizon necessary for retirement savings.
An investor who doesn’t want to actively manage the Roth portfolio can simply go for a target-date fund — a fund that grows more conservative as the investor nears and enters retirement — which is still a more appropriate choice than the low-yielding G fund.
The additional earning power and flexibility is a major consideration, and could even make simply holding a low-minimum fund in a taxable account a viable alternative.
Fund companies have moved away from offering low minimums in recent years, not wanting to service tiny accounts on which there was little or no money to be made.
In general, an investor who wanted to find a low-minimum fund had to settle for higher costs; that barrier to entry — high minimums or high costs — is really what the myRA is trying to solve.
That, and the idea that having it flow through employers means money can be set aside before it goes home and is spent.
But plenty of funds offer reduced minimums for investors who agree to make monthly deposits of $50 or $100.
And other fund firms have reduced minimums on IRA accounts; likewise, some brokerage firms have no minimum for opening an IRA or waive the requirement for monthly automatic deposits, which allows an investor to use ETFs, which helps to minimize any cost edge the myRA might have.
Ultimately, the story is that minimum-investment requirements should not be a factor keeping anyone from saving.
You may have to make some calls to find who offers deals or waives fees — and you might have to settle for a fund company that’s not the darling of the media — but you’re not locked out of the fund world just because you don’t have a big wad of cash ready to invest.
People choking on debt and expenses and unable to save won’t be attracted to the myRA any more than they have been to the Roth IRA.
You can’t save a drowning man by throwing him a cherry Life Saver, and the myRA is just a different flavor to some underused strategies already available. Taking advantage of it will be more a matter of taste than necessity.
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at email@example.com or at P.O. Box 70, Cohasset, MA 02025-0070.
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