I have a 401(k) for the same reason I’m an organ donor. When I moved to Rhode Island I had to go to the DMV to get a new license. After hours of complete boredom (this was before smartphones), the DMV attendant finally called me up. As she looked over my paperwork, she asked if I wanted to be an organ donor with the same interest as if she were asking if I wanted pickles on my sandwich. Without even thinking about it, I said “uh, sure.”
My 401(k) was no different, with a HR representative taking the place of a DMV employee. She suggested that I defer 8% of my pay to get the 4% company match. At the time I didn’t know what a 401(k) even was, and I certainly didn’t know what a ‘match’ was. But she seemed to know what I was talking about, and I said ‘ok.’ Now it’s 12 years later, and because of that one dull moment, I’m way ahead of the average American in my retirement savings.
Such is the power of boredom combined with a splash of automation.
Many workers don’t have access to a 401(k) and won’t have the benefit of the HR representative that helped me. So when I heard that the government was creating starter retirement accounts, I got excited. I don’t need to cite studies or share links to convince you that America isn’t saving enough for retirement. A government retirement account with no minimum and low fees would be an oasis in a desert of complex retirement products. So how does myRA, the treasury’s new retirement account, stack up?
First, the pros:
- No fees. myRA is completely free to use. Nearly all investment accounts carry some kind of fees: sometimes there’s a flat fee when money hits the account, sometimes there’s a yearly expense ratio, and sometimes there’s both.
- No loss of principal. All myRA contributions are placed into a government securities fund previously only available to government employees. It provides a yearly return that, while low compared to stocks, is higher than a savings account and carries no risk. Simply put, you will not lose money in this account (except possibly to inflation; more on that later).
- Investment is automated. As long as your employer uses direct deposit, myRA can be set up to automatically invest. This is important, because we rarely miss the money we don’t see.
- No minimums to start. This is a large benefit, as most of the best investment companies require minimum deposits. Vanguard, which generally has the lowest fees, requires $3,000 to start investing. Fidelity requires either an initial deposit or set monthly contributions. myRA, however, has no minimum deposit and no minimum monthly investment. You could theoretically save $1 per pay period in this account.
- The earnings are never taxed. myRA works like a Roth IRA. This means that you invest using regular, after-tax money. However, as long as you wait until you’re 59 ½, you will never be taxed on this money again.
Unfortunately, there are some cons:
- This isn’t your forever retirement account. Once the account reaches $15,000, it must be rolled into a standard Roth IRA. This adds a level of complexity and opens up the financially un-savvy to making some bad decisions with their money.
- You’re not harnessing the stock market. Historically, nothing has matched the stock market for long term, passive gains. By comparison, the government securities at the heart of myRA run closer to the rate of inflation. Over a ten year period, the government securities fund has returned 3.19% per year to the S&P 500’s 9.44%. In years of high inflation, your myRA may actually lose money in real terms, meaning that your money will buy less goods.
- There’s no incentive match. The most useful part of an employer retirement program is usually the company match. This is the free money used as an incentive to encourage participation in the plan. myRA contains no matching incentives.
- There’s no up-front tax savings. The most underrated feature of a 401(k) is that it lowers your taxes up front and puts money in your pocket today. That money can be spent if necessary. Or better yet, it too can be invested, which creates a snowball effect on your assets. The myRA is funded with after-tax money, meaning you don’t get any benefit today, only a deferred benefit down the line.
- Lower income workers will see no tax benefit. It’s important to note where we’re at as a country with capital gains tax. Right now, for families making under $73,800 per year, long-term capital gains are taxed at 0%. Does this ring a bell? This is the same 0% that the myRA accounts are taxed at. So for lower income families, who are the primary target of myRA accounts, there are no tax benefits at all over a regular taxable investment account. Most families would be better off with a taxable account, as there are more options.
- It doesn’t pass the DMV test. In the end, this might be its biggest drawback. Unlike with my organ donor status, or my 401(k), no one is going to show up asking to enroll employees in a myRA account. Most employees will have to ask to open the account, as well as printing and filling out a direct deposit form. Anyone with this much initiative might be likely to open a retirement account regardless.
In the end, I respect the idea. But I don’t quite know whom myRA is for, nor do I foresee many people signing up. Anyone with the initiative to find this account could just as easily find a better one. But if you don’t have a retirement account yet, and you want to get your feet wet with investing, myRA is worth looking into. You can’t lose money, and no slick money managers are going to gouge you with fees. For some people, that might be enough.