Friday, November 6, 2015

myRA Good but Could be Better

Social Security, America’s great contract with itself, has proven a success over the decades. It is almost universally accepted by voters of all persuasions. The Government, in its infinite wisdom, takes a portion of my income, not as a tax, but as an enforced savings program. The promise is that MY MONEY with interest will be returned to me when I am old and feeble. That has happened as promised since the act was first signed into law in 1935. Social Security is termed the “third rail of American politics” for good reason. The politician that touches it, will surely be electrocuted by the electorate.

The problem is that Social Security was never intended to provide a living income in retirement. It was a guarantee to cover minimal food and shelter, the first leg in the traditional three legged stool of Social Security, pension, and personal savings. The defined pension has almost disappeared from the American corporate landscape. Public pensions, while generous, are threatened by local and perhaps state funding shortfalls. The largest chunk of personal savings came from the equity in the big house in the expensive neighborhood that was exchanged in retirement for the little cottage in a low cost region of the country. That worked until 2006. Then the slow motion train wreck of the real estate bubble and the stock market crash of 2008-2009 did a number on the savings of the average prudent American.

The myRA was introduced to encourage low wage earners without access to a company sponsored 401(k) the opportunity to save for their retirement on a regular basis, a good idea.

All that is offered to the applicant is the G fund (Government Security Fund) that is offered Federal employees who participate in the Thrift Savings Plan. This fund paid a measly 2.31% in 2014. Don’t get me wrong, I actually own shares in the G fund. Your money is secure, but unlikely to beat inflation by even a single percentage point. Every portfolio should contain at least some Government Securities, but it should also contain stocks and commercial bonds that offer great risk with the probability of greater returns. The Thrift Savings Plan also offers four more low cost index funds to supplement the G fund. I own shares in all of them.

F fund: A fund that mimics the performance of Barclay’s Capital U.S. Aggregate Bond Index

C fund: An S&P 500 index fund

S fund: A fund designed to match the performance of the Dow Jones U.S. Completion Total Stock Market index of U.S. companies not listed in the S&P 500.

I fund: A fund designed to match the performance of the MSCI EAFE index of international companies.

One more note on the G fund: It is structured in such a way as to guarantee a slightly higher rate of return than is offered by similar commercial funds. Some in Congress wish to end this disparity, as a cost cutting measure.

The myRA is essentially a mini-Roth-IRA sponsored by the Government. This is a good thing. It can be funded by any after-tax income, including direct withdrawal from a paycheck. This is a very good thing. Money that you never seen isn’t missed. Direct withdrawal is a significant plus. In addition, money can be withdrawn from your checking account, not a good idea for the low income worker, or deposited on a one time basis.

Up to $5,500 per year can be contributed to a myRA account. This number is $6,500 for individuals over 50 years of age or older. Although it is unlikely that a low income worker would have $5,500 a year to deposit in his account during any given year, it is a nice option. Who knows, he may have a very good year.

The big plus offered by the myRA to the low income employee is no minimum contribution. Most commercial Roth-IRAs have some minimum requirement to open an account, usually $1,000 or $3,000. This could be a deal breaker for a near minimum income worker. This is a very good idea.

There is a $15,000 limit on the amount that can be held in a myRA account. Any money beyond $15,000 needs to go into a private Roth-IRA. Any money held in a myRA account can be transferred to a commercial Roth at the discretion of the investor, a good thing.

All things considered, I am pretty happy with the myRA. I would be happier if it was offered to low income workers on an “opt out” rather than an “opt in” basis. Companies threatened with discrimination suits due to uneven participation in their 401(k) programs, have learned that forcing the employee to “opt out” by checking a box, significantly raise the participation rates of all groups. I would be happier still if the participants were offered a full range of investment options along with some very simple information on the virtues of asset allocation.

Getting something like this passed and signed is at best difficult. I am thankful to get “good,” but I hope that in some future modification of this law, we will be offered better.

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