All it takes to start saving for retirement is $25.
President Obama unveiled “myRA” in his State of the Union address this year — a new type of retirement account designed for people without access to employer-sponsored plans. MyRA is billed as a “way for working Americans to start their own retirement savings,” however the program is not without questions and controversy.
MyRA is intended to provide people with an easy manageable way to save outside of employer-sponsored coverage. Using these public “starter” accounts, workers can have a portion of their paycheck deposited into a myRA account every payday. Contributions can be as low as $5 and are backed by the U.S. Treasury.
They function like a Roth IRA in that they allow people to invest after-tax dollars and withdraw the money in retirement tax-free. The program has no fees and earns the same interest rate as federal employees with retirement plans. Participants can save up to $15,000 over 30 years before transferring the balance to a private fund.
So is myRA for you? These plans are available to households earning up to $191,000 a year who are not enrolled in 401(k) programs. During the initial pilot program, they will only be available to employees of employers who choose to participate by the end of this year. Employers are not responsible for administering or contributing to myRAs, so there is no downside for them.
The White House presented myRAs as part of a larger effort to relieve the financial burdens of middle class Americans and provide them with greater security. More than 90 percent of working households do not meet conservative retirement savings targets for their age and income, and there is a persistent downward trend in corporate pensions. Half of all U.S. workers and 75% of part-time workers have zero retirement savings. If people are struggling to cover their regular expenses with their regular jobs, then putting money away for the future can seem impossible.
Furthermore, private retirement savings accounts are expensive. Traditionally it has not made financial sense to put small amounts into retirement accounts because the administrative expenses would drain most of the savings. This puts them out of reach for people with lower incomes.
MyRAs are free from fees, so as not to eat into the principal, but critics still say that the amounts involved are too insignificant to have a real impact. Even the max you can save in a myRA ($15,000) is not much in the grand scheme of retirement, and the returns on the investments are low.
“A new government plan that offers a whopping 1.5 percent return is not going to entice anyone to save more,” certified financial planner Scott Hanson told CNBC. “No one who is struggling to make ends meet will make the decision to go without getting the kids new shoes so they can put a few dollars into a myRA plan.”
The thing to keep in mind is that myRAs are not meant to constitute a person’s entire retirement savings. They are a starter account designed to get the savings ball rolling. The goal is to help save enough to open a private IRA, where the savings can become more substantial. Another concern with myRAs is that people will get used to saving these small amounts, and won’t ever push themselves to save more – otherwise known as “set-it-and-forget-it syndrome.”
While these are valid concerns, any program that encourages saving and makes it more accessible is good. MyRA is one example of new products and services that are democratizing the savings and investment landscape.
The views expressed represent the opinion of the author and are not intended to reflect those ofFutureAdvisor or serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities.