Thomas Knight: MyRAs… More Trouble Than They’re Worth?

Editor’s note: This guest commentary is written by Thomas Jason Knight, CFP®, Vice-president for strategic growth with Legacy Capital Group, which has offices in Little Rock, northwest Arkansas and Denver, Colorado. He can be reached by email at [email protected].

We have a retirement savings problem in this country. According to the Employee Benefit Research institute, 46% of all American workers have less than $10,000 saved for retirement. 29% of all American workers have LESS THAN $1,000 saved for retirement. Think about it… if you retire tomorrow, and you spend $100 per month on groceries alone, you’ll run out of money in less than a year.

Here is more depressing news: The U.S. Census Bureau reports that 1 out of 6 elderly Americans is already living below the federal poverty line. Over the next 20 years, more than 10,000 Baby Boomers will be retiring every day. By 2050, 90 million senior citizens will be stretching the retirement, medical and insurance systems in this country. They will probably still be competing for jobs since they won’t have adequate money saved for retirement.

I’m not a doom-and-gloom guy, so I’ll stop with the sad news. You don’t have to be a mathematician – or a financial planner – to realize that we have a problem. We have a very serious problem. It’s only going to get worse. And the federal government knows this.

During the January 2014 State of the Union address, President Obama announced the creation of a new government-sponsored savings account called the MyRA. The account specifically targets American workers who have not been saving for retirement. While it’s admirable that Obama is taking on yet another broken system, it falls short of being a viable solution.

MyRAs will be available to workers who don’t have access to a 401(k) plan through their employer. Through automatic payroll deductions, Americans with as little as $25 initially, and $5 thereafter, can contribute after-tax dollars to the account. Contributions will be invested in one investment option: a security fund modeled after the federal employees’ Thrift Savings Plan Government Securities Investment Fund. Check out this link for more information on the fund. Think “savings bonds.”

There are some attractive things about this account. According to the Bureau of Labor Statistics March 2013 data, 68% of American workers have access to pensions or retirement savings plans. So theoretically, the MyRA will reach the 32% of workers who don’t have access to these. Since employers are not sponsoring or administering them, it won’t cost the employer anything. MyRAs will be portable, so workers can keep them if they switch jobs. The ability to access the account is low – $25 is lower than many mutual fund minimums available in 401(k)s and IRAs. Finally, the biggest selling point to these accounts is that the government will guarantee the money that has been put into the account… on paper, a very attractive feature since many people still have the “Great Recession” still on their minds.

Alternatively, employees are only able to contribute up to $15,000 in total after-tax money for a maximum of 30 years. I hate to be the one to break it to you, but $15,000 isn’t going to make much of an impact on your retirement income scenarios – don’t forget about my statistics above. The single investment option is a bit concerning: while you get a principal guarantee, you forego the opportunity to capture stock market-like returns. Go to any online financial calculator and grow money over 30 years, at a 4% rate of return and an 8% rate of return, and notice the difference in your ending balance.

There are other options already in existence, such as the Traditional and Roth IRAs (individual retirement accounts) and 401(k)s which are employer-sponsored retirement accounts. These accounts allow the individual to invest in a multitude of risk-appropriate options. To me, these are true retirement savings vehicles. The average American already has low financial literacy, so by introducing a solution that really doesn’t solve the retirement problem – and yet sounds remarkably similar – myRA, IRA, this further confuses the already confused.

It’s more important for the American worker to have the discipline and financial awareness to sacrifice money today for the sake of having a better retirement tomorrow. Saving as much, and as early as possible, in life will help improve the odds that the money will last longer in retirement.

Employers can do a better job of educating people on the retirement options that already exist. If you are an employer, you can do your part by starting a 401(k) if you don’t currently offer one. If you do offer one, then take full advantage of the 401(k) provider and the advisor of the plan to do some basic retirement education for employees.

Employers and employees alike need to take more accountability over their actions. It’s the only way we can make a real dent in our retirement savings problem.

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Securities and Investment Advisory Services offered through Matt Jones, registered representative and investment advisor representative of NFP Securities, Inc. (NFPSI), Member FINRA/SIPC.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by NFP Securities, Inc. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual.