MyRA: A nice idea, but it won’t become popular

Regardless of which side of the political aisle created it, I like any product or plan that allows rank and file employees to save for retirement.

President Obama made good on his State of the Union speech promise by ordering the Treasury Department to create a new retirement savings vehicle called, MyRA.

The accounts — which are intended for people whose employer has not sponsored a retirement plan — will operate much like Roth IRAs.

Married couples with modified adjusted gross incomes up to $191,000 and individuals earning up to $129,000 will be able to save up to $15,000 total in after-tax dollars for a maximum of 30 years. Then the employee would transfer their $15,000 account balance to a Roth IRA.

MyRA contributions can be withdrawn tax-free at any time without penalty, though pulling out any earnings will be subject to the same restrictions as the Roth IRA.

Initial investments can be as low as $25, and contributions as little as $5 can be made through payroll deductions; mutual funds usuallyhave much higher investment minimums.

There will be only one investment option: The Treasury will create a security fund modeled after the federal employees’ Thrift Savings Plan Government Securities Investment Fund, which pays a variable rate.

For the year that ended in December 2012, it had an average annual return of 1.74 percent. It posted an average annual return of 2.69 percent for the five years that ended in December 2012. There will be no fees. No fees are nice, but that annual return isn’t inspiring.

Sounds great, but I doubt that there will be any wide interest in that. First off, an Employer would have to make that MyRA available for their employees since it requires payroll deductions.

Second, how could rank and file employees afford to make after tax contributions to their plan if they are lower paid? The problem with 401(k) plans has been such low participation amongst the lower paid since they don’t have enough disposable income to make tax deferred contributions under a 401(k) plan and would have less to save if the contributions were after tax.

Thirdly, there are enough small business retirement plans available for those employers without the resources to set up a 401(k) plan such as a SIMPLE-IRA and self employed pension plan.  While MyRA requires no employer contributions (the other small business plans require contributions), I believe the lack of investment options, competing plans, and an employer’s likely unwillingness to offer them will deter participation in a plan that is probably a good idea.

MyRA is a nice idea, just don’t think it will catch on.

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