Thursday, January 30, 2014

Government MyRA Account Debuts For Beginning Investors

The US government-sponsored "MyRA" is the newest kid on the block in the universe of retirement savings accounts.  It doesn't appear to be all that impressive at first glance, but it might make a difference for people who otherwise would have nothing.  We only have media coverage of the basics at the moment, so the government should explain its full details on an official website.

The MyRA is certainly not some kind of attempt at confiscation.  Sovereign Man's "Simon Black" and other fringe finance sources pushing this line need to calm down.  It does not direct existing IRAs of 401(k)s to reinvest assets exclusively in government bonds.  It does not even appear to be mandatory.  The MyRA is a new mechanism independent of those accounts.

Account minimums tell us everything about the target market.  A MyRA account minimum of $25 and monthly paycheck contributions of $5 are barely condiments on a nothing-burger.  Putting five bucks a month into an account seeded with $25 gives an investor $85 at the end of the year.  Setting the maximum size for the MyRA at $15,000 is hilarious.  Someone saving $60 per year is not going to accumulate $15K over a lifetime with interest rates on new Treasury bond issues in the low single digits.  The power of compounding that Warren Buffet likes works best when you have significant amounts to compound.  If you don't believe me, do the math yourself.  I used the SEC's compound interest calculator at to figure this out.  I typed in $25 for the current principal, $5 for the monthly addition, 30 years to grow, and assumed a more normal interest rate of 5% compounding at one time per year.  I got an ending value of $4,094.38.  That's what I think a MyRA investor can reasonably expect from no-fee government bonds.  It's not much to those of us who won the intellect lottery at birth but to your average burger-flipper it must look like a king's ransom.  Try living off a four-figure sum in retirement.  The MyRA won't be enough to bring retirement security on its own, even for investors putting in enough to get the compounded amount to $15K in their lifetimes.

The product available to MyRA investors is likely to be the G-Fund from the Thrift Savings Plan.  The amounts investors may contribute are too small to buy a whole bond outright, even if the bonds are packaged as "R-bonds" designed specifically for retirement accounts.  There's nothing wrong with using an existing product as an expedient way to get Americans to plan for retirement.  It is consistent with the adoption of low-cost superannuation-type funds as the preferred approach for retirement reform in America.  The biggest risk for investors in a concentrated government bond position is of course inflation but the MyRA target audience won't understand this risk.  Americans who bought war bonds during World War II experienced sustained postwar inflation that severely harmed the value of those investments.  That worked out fine for the Federal Reserve as it helped the US government reduce its debt repayment burden by sustaining inflation.  MyRA's G-Fund investors will not be sufficiently diversified to endure future inflation unless they also have conventional IRAs invested in equities or hard assets.  Good luck getting that message out, Uncle Sam.

Any education effort aimed at MyRA's target audience of investors will probably be a waste.  People will forget they have these accounts because the amounts are so small.  The concept of retirement savings is an abstraction for people living paycheck to paycheck.  It's the same problem I identified when I recently discussed the unbanked population.  I would prefer to see the MyRA somehow joined to a public option bank in each state.  I suspect that the target demographic of MyRA investors is the same audience heavily dependent on unemployment benefits and other forms of public assistance.  Collecting all of these transactions under one roof in a public option bank provides a platform for the delivery of financial literacy training.  Low-income, low-information people won't pay attention to education without incentives.  "Come get your EBT card recharged at the public bank, and don't forget to start your MyRA payroll deduction."  

This new approach is aimed at low-information voters who are probably incapable of understanding the concepts of dollar-cost averaging, portfolio diversification, and full contributions that trigger employer matching in 401(k)s.  Any American worker who isn't covered by an employer's 401(k) at work has always been free to set up an IRA at any brokerage or bank.  That lesson is lost on Americans who earn little and don't understand finance.  The government should play a role in helping that population become self-sufficient and MyRA is a good try at a solution.  It's like an IRA with training wheels for beginning investors who need habituation to deferred gratification before they can graduate to more complex IRAs.  Uncle Sam needs to put me in charge of this thing so I can graft it onto public banks.