myRA Plan Will Fail. Several Reasons Including Most Americans Living Check To Check. Will It Get Through Congress?

CHUCK JAFFE Archives | Email alerts

Feb. 1, 2014, 8:11 a.m. EST

The trouble with Obama’s myRA plan

Retirement plan helps those with no 401(k), but not much

By Chuck Jaffe, MarketWatch 

Real life isn’t always a “Field of Dreams,” where “if you build it, they will come.”

Instead, there are times when you build it, and they go “Ho-hum,” and mostly ignore you.

So while any effort to encourage increased retirement savings among workers deserves to be applauded — arguing against increased savings is like disputing the value of parenthood and apple pie — it’s hard to see President Obama’s myRA program achieving most of its goals, because once you get past what he described during the State of the Union address, it appears to be a lot of wishful thinking.

Let’s do the digging and see why that is.

Click to Play

Obama's MyRA proposal: Mind the 'buts'

Charles Jaffe look at the details behind President Obama's "MyRA" savings program and advises investors to read the fine print .

The awkwardly named myRA (rhymes with IRA, as in the individual retirement account it is designed to supplement) was unveiled by President Obama this week as 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 offer a plan.

The basic details released to this point make it clear that myRAs will be backed by a security that looks and feels like a savings bond, 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. (It’s similar to another idea the Treasury has been working on for at least four years now: the R-bond, a retirement product that would let employees direct part of their paycheck toward an investment.)

Savers would be guaranteed that the value of their account would never go down; they would pay no fees on the accounts.

Savers can open the accounts for as little as $25 and can make additional contributions in amounts as small as $5. In this regard, it’s like savings bonds in their prime, from the 1940s through the 1980s, when savers regularly set aside small dollar amounts through payroll plans. The result of all of those small bond purchases was a lot of “shoebox millionaires,” folks who had boxes and boxes of savings bonds stuck in an attic, representing riches amassed by years of small, government-protected savings.

The myRA will use 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. Employers aren’t required to take part in myRA. Obama can start his program without legislative approval, but a proposal forcing employers who have no retirement plans to participate would require a vote from Congress.

All of that sounds pretty good. Here come the “buts”:

1. The G Fund in 2012 — the latest year for which numbers are available — returned 1.47%, and has an annualized average return from 2003 to 2012 of 3.6%. The problem is that inflation in 2012, as measured by the Consumer Price Index, was 2.08%, which means that in real-return terms, G Fund savers lost ground. The value of their account was up, but their purchasing power was diminished.

Obama is introducing his program just as interest rates appear to be coming off the bottom, and at a point where many observers expect an increase in inflation going forward. If the myRA can’t generate more in returns than inflation, even if it succeeds in getting people to save, they won’t be saving well.

2. The myRA program has a $15,000 limit — after amassing that much, savers will have to move their dollars to a Roth IRA — which isn’t exactly allowing anyone to become a modern-day shoebox millionaire through a lifetime of savings. That limit curtails some effectiveness: Reach the $15,000 limit and you must transfer the funds, so your government guarantee of a protected investment is gone. That’s a flaw if the idea is to help people develop protected lifetime savings.

3. The structure encourages savers to use the myRA for their immediate investment benefit rather than for their long-term savings.

The G-Fund payout of 1.47% in 2012 is a far sight better than most savers could have gotten from a bank account at that time. Let’s assume that trend continues; with the myRA having no penalties for withdrawal, it can be used as a better alternative to a savings account for people trying t

http://www.marketwatch.com/story/the-trouble-with-obamas-myra-plan-2014-01-31?siteid=yhoof2