Tahoe Market Pulse: The myRA — good idea, bad execution
The government recently introduced the My Retirement Account (myRA), which is designed to help low-income workers build their retirement nest eggs.
While its goals are admirable, it’s a bad program written by bureaucrats with little understanding of the markets. It incentivizes young investors to make inappropriate investment decisions.
The myRA plan is designed for low-income workers who don’t have access to a workplace retirement plan. These “starter accounts” allow workers to deposit after-tax dollars into myRA and the funds grow tax-free.
There are no fees, there is no minimum balance, and the funds can be withdrawn penalty free at any time.
Here’s the catch: all investment dollars are placed into low-yielding U.S. Treasuries. Having young people place their retirement dollars into Treasuries is ridiculous. In 2014 the similar government Thrift Saving Plan earned about 1.5 percent.
Over the last five years the return would have been just north of 2 percent. Is that any way to build a nest egg?
No investment adviser would tell young people, where time is on their side, to avoid stocks and sit in Treasuries.
While a myRA-type account made about 2 percent annually over the last five years, equity investors saw their portfolio nearly double. Investing in the stock market over the long run is the best way to build wealth.
Interestingly, the plan guarantees investors won’t lose money. That means either the Treasuries are held until expiration (that guarantees a minimal return for at least another ten years) or taxpayers get the bill when rates rise (Treasury funds lost 16 percent earlier this year when rates ticked higher).
The goal of myRA is to get young low-income workers to start saving for retirement. I suspect, however, that they’ll want their money back when they see how little it will grow.
This program encourages the working poor to invest in the wrong area. It will do very little to help build their retirement account.
David Vomund is an Incline Village-based fee-only Registered Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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