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The Anchor That Might Drag MyRA Down

Myra
This Myra was undoubtedly more successful.

“To reach a port, we must sail – sail, not tie at anchor – sail, not drift.”
–Franklin D. Roosevelt

“Boy, that escalated quickly… I mean, that really got out of hand fast.”
–Ron Burgundy, Anchorman: The Legend Of Ron Burgundy (#aff)

In his January 28, 2014 State of the Union address, President Obama introduced a new concept called the MyRA, or, since everyone in the government loves an acronym, My Retirement Account. He even mispronounces it, causing angst to the thousands of Myras out there in the United States.

If you want to read more about the nuts and bolts of MyRA, you can check out the State of the Union Fact Sheet. Michael Kitces does an excellent job of going into the details about MyRA.

I’m all for people saving more.

However, there are two massive anchors that are going to cause issues for people who invest their money in a MyRA instead of a Roth IRA.

As we saw in “How Does Realtor.com Anchor You to High Prices,” our limbic system, or Monkey Brain as I like to call it due to its resemblance to our simian cousins, doesn’t like to think about math and numbers. Instead, whenever we see a number, whether or not the number has any bearing on what actions we should be taking, we cling to that number like it’s the last lifeboat departing the Titanic.

How MyRA’s Two Anchors Will Drag Investors to Davy Jones’s Locker

We see anchors all of the time in our financial lives. Whether it’s the minimum payment on the credit card statement, the three times your income anchor for purchasing a house, or the matching contribution on your employer’s 401k program, we are subjected to numerical anchors all of the time and probably don’t realize it.

For this reason, a way around the anchoring effect is to create default choices that keep us from thinking about those anchors. As we saw in “Commit Your Future Self to Saving,” creating automatically increasing contribution amounts to your retirement accounts is one way to get around these anchors and to prevent Monkey Brain from dipping his grubby little paws into our wallets.

Just as we try to get away from negative anchors in our financial lives, along comes MyRA to create some new ones.

$5 per paycheck and $15,000 is enough

The apparent intent behind MyRA is to get people to save something, as many of them currently aren’t saving anything.

It’s nobly intended.

However, in this case, setting a minimum threshold for investing of $5 means…

…the most common contribution amount will be $5 per paycheck!

People will think that, because it’s a starter account, $5 per paycheck is enough for them to save up and meet their retirement goals. They probably won’t start other retirement savings because if the government told them that $5 per paycheck was enough, then by goodness, it’s good enough.

Furthermore, they’ll see a major milestone in their saving and investing progress as hitting $15,000, as that’s the maximum cap before they will need to roll the MyRA account into a Roth IRA account.

As we saw in “Do You Need to Save Money in Your Twenties?”, the median balance at age 30 for successful retirements for the average 22 year old college graduate was a little over $83,600, 5.57 times the MyRA rollover threshold.

Yes, MyRA will get people into the practice of saving and putting away money for retirement, which is laudable, but practicing poor form means that you’re building an imperfect habit. If I put four wheels on the benchpress and then arch my back at 45 degrees, I might be able to get the weight off my chest, but I haven’t improved my benchpress any. My form stinks, and I’ll probably injure my back in the process. People who are anchored to $5 per paycheck and a $15,000 target will injure their retirements.

Go all-in on bonds

The only choice that MyRA investors have in their investments is the Thrift Savings Plan G-fund. While I love, love, love TSP investment funds because of their microscopic expense ratios, for younger investors – the target of the MyRA program – going 100% into bonds is a horrific mistake. As we saw in “Are We Too Conservative in Our Investments When We Are Young?” depending on our risk tolerance, we may want to invest even more in equities in our twenties and thirties than the typical 110 – age glide path.

The investment profile and that $83,600 target number for age 30 go hand in hand. Most people in their 20s won’t be able to save $83,600 out of their incomes, so they’ll need help from their investments to get there. Investing in low risk, low return investments will rarely get them there. They need to be invested in stocks to increase the chances of having a sufficient baseline to grow their assets to have enough at retirement to maintain the same standard of living. Not having that baseline saved isn’t a deal-breaker for having a successful retirement; it just makes the path much more difficult.

People who work for the government have six different fund families to choose from, only one of which is a fixed income investment (the L funds are target date funds, so have some fixed income, but are primarily stock based). But, the poor MyRA investors, already anchored by the incredibly low threshold for investment, compound their problems by investing solely in government bonds.

This sole choice may also anchor their investment strategies for the future. If the government says that bonds are the right choice for investing when you’re young, then it would make sense for bonds to be the right investment all of the time. If stocks were a good investment, why wouldn’t the government offer the L, F, C, S, and I funds for MyRA investors?

Thus doubly anchored, people are going to participate in the MyRA program thinking that they’re doing the right thing only to come out the other end of the program 30 years later to discover that they’re woefully underinvested and unprepared for retirement.

As Greg from Control Your Cash describes it, the MyRA program is “poverty, perpetuated.”

By

Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business.

You can read more about him in the About Page.

6 replies on “The Anchor That Might Drag MyRA Down”

Good points, Jason– I think the MyRA was born more out of hope & desperation than out of great expectations. Short of mandatory payroll contributions, what else could we possibly do to get people started?

I hope that the TSP board or the CFPB latches on to MyRA as a “gateway drug” to educate new savers. However most of the people who are already eligible for a TSP account could do a lot better.

I’m surprised that they didn’t at least use the Australian or Chilean model as a starting point. This seemed like an act by a political party to do something so that its leaders could point and say “look at what we did to help retirement!” even though they thought very little of the execution or unintended consequences. The best outcome of this might be that it forces public discussion about retirement savings, though, as an individualist with a very internal locus of control, while I am glad that there are tax incentives to saves, I believe it’s an individual responsibility. MyRA does very little to move that effort forward, particularly because of the anchoring issue that will become, I fear, the default answer.

I’d love for a politician to take Nudge’s suggestion of paternalistic libertarianism: set retirement accounts’ defaults to the (most commonly understood) beneficial action. For example, when you start working, the SSA opens up a Roth or Traditional IRA in your name, with no fees, and sets the contribution to put $5k annually into a total stock index fund. That’s the default. You can opt out. But Monkey Brain is lazy. So, most people will stick with the default.

Agree with all your critiques of MyRA. It is a terrible combination of too little, too late.

I would set a % (say, SAFEMIN) rather than an amount. Otherwise, it doesn’t adjust as you increase (assumedly) your salary. Funny in that Sunstein et al are advisors to the administration; yet, they come up with this, shall we say, subpar offering. MyRA > nothing, but not by a lot.

The only area I can think of where this is beneficial is for people who can’t save enough on a periodic basis to get over the IRA account minimums. Still, most minimums are so small if you have an automatic transfer that it’s not an insurmountable hurdle for just about anyone short of those who are legitimately getting public assistance. I’d set the over/under line on participation at 200,000. Much ado about almost nothing.

Here’s how impressed I am:

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