MyRA: The Administration Answers FSI's and SIFMA's Whines Via Disintermediation

WHAT IS IT?

The myRA is new type of retirement savings account geared toward new savers, low and middle-income earners, and people who aren’t offered a retirement savings option through their employers. MyRA would make retirement savings accounts available to individuals earning up to $129,000 per year and couples earning up to $191,000 per year. In both instances the workers must be employed by employers don't offer retirement savings plans and who agree to participate in the program. These accounts will be offered through an initial pilot program to employees of employers who choose to participate by the end of 2014. 

The accounts would be structured like Roth IRAs. Contributions can be withdrawn tax-free at any time; in this respect the MyRA account operates more like a tax-free money market account.

Participants could save up to $15,000, or for a maximum of 30 years, in their accounts before being required to transfer their balance to a private sector Roth IRA.

Savers in the account will benefit from principal protection, so the account balance will never go down in value. Each savers’ account is invested solely in the Government Securities Investment Fund (also known as the “G fund”). The G Fund invests exclusively in a nonmarketable short-term U.S. Treasury security that is specially issued to the TSP. The earnings consist entirely of interest income on the security. he G Fund interest rate calculation is based on the weighted average yield of all outstanding Treasury notes and bonds with 4 or more years to maturity. As a result, participants who invest in the G Fund are rewarded with a long-term rate on what is essentially a short-term security.

The G fund is currently available to federal workers enrolled in the Thrift Savings Plan. It has an average annual return 2.24 percent over the past three years according to the funds website, www.TSP.gov. The administrative expenses assessed against this fund (as with all TSP funds) were a low 0.027% in 2011.

Initial investments could be as low as $25 and contributions that are as low as $5 could be made through easy-to-use payroll deductions.  Savers have the option of keeping the same account when they change jobs and can roll the balance into a private-sector retirement account at any time.

WHY WAS IT CREATED?

There is no doubt that there is a substantial shortfall in the retirement savings of individual Americans. The MyRA is being established to make a small dent in this underfunding of retirement needs.

We can speculate, however, that part of the impetus for the establishment of these accounts was Wall Street’s moaning and groaning over the past few years. As fiduciary rule-making has progressed through the U.S. Dept. of Labor, Wall Street has incessantly complained that small individual IRA account holders and 401(k) plan participants will be denied advice if they cannot sell expensive products to them.  As stated by the Financial Services Institute in June 2013: “If the DOL’s proposal were adopted, many broker-dealers and financial advisors would be forced to withdraw from the market of advising Covered Plans, their participants and IRA investors, reducing access to these types of services.” As stated by SIFMA, Wall Street’s other lobbying arm, “SIFMA is concerned that this proposal will limit investment choices and drive up costs for the individuals it is intended to protect.”

Of course, Wall Street’s claims are not true, and they ignore the fact that there are many independent registered investment advisory firms (Wall Street’s ever-growing competition) that currently serve small investors for fees that are remarkably low.

Still, the Administration heard Wall Street’s whines, and must have decided that disintermediation – cutting out financial services firms completely – was the proper thing to do for many small investors.

IS THE MYRA A GOOD THING FOR CONSUMERS?

Yes, from the standpoint of encourage more individuals to save for retirement.

Yes, from the standpoint of ensuring a conservative rate of return with no interest rate risk and no threat to loss of principal.

No, from the standpoint that very small savers will take a long time to reach the $15,000 limit, and their investment returns will likely be much lower, over the long term, than if they had just decided to establish Roth IRA accounts which, in turn, were invested in a stock index fund.

WHAT DOES THE FUTURE HOLD?

It does not take a rocket scientist to see where this is going.

Investors in these accounts will see years when the stock market soars, yet their returns are very low. Before long the U.S. government will likely open the other Thrift Savings Plans investment accounts to MyRA account owners.

And, when investors accumulate $15,000 in the accounts and are forced, by current regulations, to roll the account over into a Roth IRA, they will likely scream. Why abandon an account which apparently has no annual fee and an extremely low annual expense ratio? It won’t be long before the MyRA account limit is raised substantially, or limits are removed completely.

In essence, financial services disintermediation takes place. And it will continue to take place, now that the door has been opened. This may be the beginning of the end of defined contribution plan and IRA accounts managed by private financial services firms.

The government is pressured to reign in the high fees and costs imposed by Wall Street and the insurance companies. The federal government knows that these high fees and costs unnecessarily impair the retirement security of individual Americans. And, given the inadequacy of preparation for retirement (and substantially less accumulated for same, due to high intermediation costs imposed in many retirement accounts), the federal government seeks to reduce the burden which will necessarily result – on both federal and state governments – from retirees ill-equipped to meet their financial needs in retirement.

Thank you, Financial Services Institute, SIFMA, and your members in Wall Street firms and insurance companies. By your misrepresentations and complaints, you’ve begun the process of federal government takeover of all retirement accounts.

IS THERE A BETTER SOLUTION TO OUR RETIREMENT CRISIS?

Yes, there is. The U.S. Dept. of Labor has made great progress on disclosures and benchmarking for plan sponsors, which in turn have driven down retirement plan costs substantially. Participant disclosure of service provider compensation is also leading to increased pressure to cut out unnecessarily high fees. The third act of Phyliss Borzi's well-thought-out play needs to now air - the application of fiduciary standards to all providers of advice to plan sponsors, without exception.

If we really want to improve the retirement plan world, it is Congress which can do more. Through simplification.

Why do we have so many different types of retirement accounts – 401(k) accounts, 457(b) accounts, 403(b) accounts, SIMPLE IRAs, SEP IRAs, IRAs, Roth IRAs, etc.? It makes no sense. Not to mention the several types of defined benefit plans.

Any why do we permit such plan complexity – different vesting schedules, different rules on plan loans, etc. Specialized third-party administrators, actuaries, ERISA specialist attorneys, and many more expensive service providers exist to seek to navigate plan sponsors' retirement plan ships through this maze of complex retirement plan offerings and regulations.

Congress can move to adopt just a few different types of retirement plan accounts!

1) Employer-sponsored retirement plan accounts, with 100% immediate vesting. No complex rules requiring annual testing to ensure high-net worth individuals are not unfairly compensated. Annual contribution limit of $25,000 (tied to CPI-U as to future years, in $1,000 increments) for each and every participant. With an option for employers to contribute up to $12,500 a year (either as a fixed amount or as a percentage of each worker’s pay) to match employee contributions, as determined each calendar quarter by the employer. And the option for the employer to contribute a lump sum or percentage of worker’s pay (up to the entire maximum amount allowed each year), while requiring no employee contributions.

2) Individual retirement plan accounts. Annual contribution limit of $25,000 (tied to CPI-U as to future years, in $1,000 increments) for each and every participant.

For both of the accounts set forth above, no income limits for those who desire to contribute to the above accounts. But, $25,000 maximum (subject to CPI-U increases) combined contributions for all accounts, for each individual. Maximum amount each year is also limited to earned income (salary, wages).

3) Defined benefit plan, of only one type, with reasonable caps on maximum annual benefits that can be provided to any employee. There will still need to be regulations of these types of accounts, but actuarial calculations could be standardized according to government-issued tables.

Let’s cut the costs of maintaining defined contribution and defined benefit plan accounts, by simplifying their costs of administration substantially. Now that’s a way Congress can react to the Administration’s MyRA accounts, which just complicate the existing maze of retirement accounts which both individual workers and financial advisors must master.

As a country with limited resources, we cannot afford inefficient government, nor government which makes private sector employee benefits unnecessarily complex. Simplify, simplify, simplify.

(P.S. - I know I'll be asked why I didn't include Roth IRA options for the accounts above. While the Roth IRA is a great idea for investors in those accounts, it is not a good thing for America itself. It deprives the U.S. government of too much future revenue. I believe existing Roth IRA accounts should be grandfathered in, but Roth IRA and Roth 401(k) accounts not be permitted, nor any additions to existing accounts permitted. This can be undertaken during the upcoming planned overhaul of the U.S. tax system.)