USA Says No to myRA--Good Riddance?

MyRA is dead.  On July 28 the U.S. Treasury department announced that it was ending the program that began about three years ago as an attempt to entice workers without access to an employer-sponsored retirement plan such as a 401(k) to save money for retirement through a government sponsored account. 

 

Economists estimate that more than half of American workers—around 55 million people—fall into that category.  So with such a great need, why end the program?  It came down to two things: too little money…..and too much money. 

 

Too little money in the sense that too few people were putting too few dollars into the accounts.  Only 30,000 people opened myRA accounts, and of those only two-thirds actually made any deposit at all to their account.  The median balance of the accounts was $500.  That is, half of the account holders had less than $500 saved.

 

Too much money because the federal government spent $70 million to operate the program since its inception yet only enrolled that relative handful of participants.

 

A lot of folks are complaining that ending this program is a slap in the face to the little guy and is putting a significant portion of our national population at risk of not having a vehicle for saving for retirement.  I thought Money magazine was particularly harsh in its criticism of the president and his administration over this decision.

 

This administration has no shortage of missteps, but this wasn’t one of them.  (I think every administration makes mistakes, so don’t try to guess my politics from any of this.)  Ending myRA was the right decision, for what I think are some very solid reasons.

 

The cost vs. the results: If Ben & Jerry’s launched a new flavor of ice cream, served it in all their stores, and the average B&J store served 100 customers per day, but they only had one person each month at each store actually try the new flavor, how long would B&J keep making and serving that flavor?  Probably not three years.  At some point they cut their losses and admit it’s not working.  That’s roughly the equivalent of Treasury’s dilemma with the myRA program.  The government has a responsibility to spend our tax dollars wisely.  Spending what amounted to $2333 per person to help them save an average of less than half that amount is inefficient, to put it kindly.

 

MyRA was an awful savings tool: Balances were capped at $15,000 at which point the money had to be transferred to an Individual Retirement Account.  Moreover, they had only a single investment choice: a Treasury bond currently yielding about 2%.  No wonder that, even with the record high stock market going on, balances stayed so low.  What newcomer to retirement saving is going to get excited over a return that small?  It might even turn that person off to saving to the point he throws up his hands and says, “What’s the use?”

 

Sky-high administrative fees: myRA account holders didn’t have to pay administrative fees; but that doesn’t mean the accounts didn’t have expenses.  That was probably the greatest irony in Money magazine’s story about myRA.  Money is well known for promoting low-fee investment choices, rightly pointing out that lower fees are predictive generally of better investment results.  While the editors would look askance at a mutual fund that even approaches a 2% administrative fee, they apparently failed to do the math on the figures they quoted on the government’s expense ratio.  To manage the approximately $34 million on deposit in myRA accounts, Treasury expected to spend about $10 million annually.  Hey Money editors, that’s a 29.4% administrative fee.  Wake up.

 

Taught all the wrong lessons:  myRA did not adequately mimic a 401(k) account.  From the single investment choice to the low cap on the maximum balance to the “no minimum balance” requirement, this savings vehicle tended to convey the message that saving for retirement was easy, free, and without risk.  In fact, though, savers must sometimes sacrifice to save and must pay administrative fees.  And over the long term it is riskier for one’s financial security in retirement to not be invested in the stock market than to be invested in a too-conservative option.  MyRA taught none of that.

 

Better ways to save:  States are starting to launch their own programs to encourage and enable retirement saving for workers without an employer retirement plan.  Private sector financial firms of all sorts, including local banks, can open individual retirement accounts for clients.  More than an account in which to put their savings, most people need education about how to save.  Whether that be done in the schools, by employers, by public service agencies like an extension service, or by the banks and investment firms themselves, I still think that is the greatest need. 

 

Until next time,

Roger

 

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