Looking at MyRA: a ‘starter” retirement account

March 21, 2014

President Obama mentioned the MyRA (My Retirement Account) in his State of the Union address, and naturally it raised a lot of questions. Here are some answers and observations.

The MyRA is a “starter” retirement program available to everyone, unlike employer sponsored programs such as 401(k)s, 403(b)s and 457 plans which are only available to the employees of companies who sponsor a plan. It will also be available to companies if they choose to offer it. The White House says it will “aggressively” encourage employers to offer the program, noting that they won’t have to administer or contribute to the accounts. I wonder what that means?

Naturally, there are some rules. Here is one of them. All workers may invest in this program, including those who would like to supplement an existing 401(k) plan, as long as their household income falls below $191,000 a year.

MyRAs are built on a Roth chassis. Contributions are made with after-tax dollars, and withdrawals, if made properly, will be tax-free. This differs from a traditional IRA in which contributions are made with before tax dollars and withdrawals are taxable.

How much can someone invest? Initial investments can be as low as $25 and workers can contribute as little as $5 at a time through automatic payroll deductions. Like a traditional Roth IRA, savers will be allowed to contribute up to $5,500 a year under current limits. This floor comes with a low ceiling.

However, unlike most Roth IRAs that offer different investment choices, MyRA accounts invest solely in government savings bonds which are backed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. so savers can never lose principal. While this sounds great, in the long run, which retirement plans are based upon, this may not be a great investment vehicle to outpace inflation.

When it comes to long-term investing, history shows that growth is better than a guarantee. Here’s why. The Ibbotson chart hanging in my conference room shows that between 1926 and 2012, small stocks have earned 11.9 percent, large stocks 9.8 percent, long-term government bonds 5.7 percent, treasury bills 3.5 percent, and inflation has been 3.0 percent. If you don’t mind a roller coaster ride, and you are very young, you might want to put all of your money in stocks. However, most people only like roller coasters in amusement parks, not their portfolios, so they diversify among stocks, bonds and cash.

Looking at growth versus guarantee through another prism shows that the rate of inflation over 86 years has been 3 percent, and the rate of bonds over the same period has been 5.7 percent. So a bond return is not likely what you want for a long-term retirement fund.

But wait a minute, upon reviewing the website of the Thrift Savings Plan (TSP) one sees the G Fund, the government bond fund on which the MyRA is based, the C Fund that is made up of the stocks of large and medium-sized U.S. companies, the S Fund that holds the stock of small to medium-sized U.S. companies and the I Fund that holds international stocks of 22 developed countries.

The president has oft made mention of his “pen and your phone” to get things done because of a recalcitrant Congress. Well, he has already used his pen to direct the Treasury Department to set the MyRA into motion, although I believe that it is the job of Congress to do that, so why doesn’t he use his phone and talk to the TSP to make the stock funds available to the “folks” as well?

One more thing, at the top of the page outlining the G Fund, you will find the following “guarantee”: Government Securities Investment Fund is mention of, “avoiding exposure to credit (default) risk.” At the bottom of the page is a PDF that contains a letter dated November 15, 2013 from Alastair M. Fitzpayne, Assistant Secretary for Legislative Affairs to Gregory T. Long, Executive Director of the Federal Retirement Thrift Investment Board.

Here is the last paragraph of the letter, “Enclosed is the report covering the operational status of the G Fund during the most recent debt issuance suspension period. As explained in the report, the Treasury has fully restored the G Fund to the position it would have been in had there not been a debt issuance suspension period.”

Interestingly, with a $17 trillion national debt, Congress recently passed a “farm bill” that spends $956 billion between 2014 and 2023. The following is from my buddy, Neil Cavuto’s website regarding some of the elements of the “farm bill”:

  • $2 million for sheep production and marketing;
  • $10 million for Christmas tree promotion;
  • $170 million for catfish oversight;
  • $119 million for peanut crop insurance;
  • $100 million for organic food research;
  • $150 million to promote farmers markets;
  • $3.3 billion for a cotton income protection plan;
  • $12 million for a “wool research and promotion” program; and
  • $100 million to promote the maple syrup industry.

This bill has a lot of pork.

All performance referenced is historical and is no guarantee of future results. Stock investing involves risk including loss of principal. The prices of small cap stocks are generally more volatile than large cap stocks.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual. Randy Neumann is a financial professional with and securities offered through LPL Financial, member FINRA/SIPC