MyRA, the federal government's just-launched program to encourage workers without access to a workplace retirement plan to begin saving for retirement, gets off on the wrong foot and should be changed.
The government securities investment fund underpinning the new retirement savings program should be scrapped. Instead, the Obama administration is embracing it as the sole investment option in the MyRA.
MyRA, introduced Nov. 4 by the Obama administration after a two-year trial, promises to kick-start a retirement program for those Americans without any workplace plan and bridge the retirement savings gap.
But MyRA gets participants off on an unpromising start. It provides the participants with only one investment option, a special fund based on the government securities investment fund called the G Fund. The G Fund has long been the centerpiece of the federal employee Thrift Savings Plan, the largest retirement plan in the nation, and by far the most popular of TSP's investment options.
For the TSP, as well as now for MyRA, the fund offers unrealistic portfolio stability and risk-adjusted returns essentially subsidized by the Department of the Treasury and, ultimately, taxpayers. Its returns are too low to meaningfully contribute to retirement income objectives.
Participants in the new MyRA and TSP enjoy advantages with the government securities investment fund that participants in other defined contribution plans, whether public or private sector, don't have.
The challenges of using the government securities fund to move participants to their retirement income objectives have been recognized recently by the Federal Retirement Thrift Investment Board, which oversees the TSP. The G Fund has the most assets of any of the TSP investment funds. As of the end of September, the fund had 37% of the TSP's total $443.3 billion in assets. The $164 billion in the fund makes it the largest single allocation to any type of investment of any U.S. retirement fund.
The fund is invested in special, non-marketable interest-bearing obligations issued by the Treasury Department. While the fund's interest rate fluctuates with the market, participants in the fund aren't subject to any interest-rate risk on their principal value, which remains stable and which has immediate liquidity. The MyRA website touts that the fund returned an average of 3.19% over the 10 years ended last Dec. 31. It fails to note the recent rate of 2.04% for the 12 months ended Oct. 31, a more than 35% drop in the fund's interest rate.
Since the fund's principal value is stable, it operates like a traditional money market fund, whose principal value never fluctuates, but it offers a much higher interest rate. Not only are conventional money market fund interest rates significantly lower, but stability of the principal is at risk.
Interest rate fluctuation is a particular investment risk to all asset owners and other institutional investors. That risk is of concern to participants in defined contribution plans as well as retirees from those plans as they manage their assets, especially seeking to reduce volatility in principal value to address their liquidity needs.
The market has been on heightened concern for months in anticipation of potential action of the Federal Open Market Committee to raise interest rates by increasing the federal fund rate from the current 0% to 0.25% range.
A rise in interest rates will lower the fixed-income principal value essentially in line with its portfolio's duration, a measure of the sensitivity of the value of a bond to a change in interest rates. A principal value of a portfolio with a duration of, say, three years would decline by 3% with a 1% rise in interest rates.
MyRA and TSP participants aren't subject to that decline in principal value. They benefit, in fact, from a rise in interest rates, which raises their portfolio yields. There is no reason MyRA or TSP participants should get this protection and higher yield in addition to the tax-deferral of their savings.
The government securities fund doesn't eliminate all investment risk. The fund has inflation risk of the principal value not keeping up with the cost of living.
The Thrift Investment Board, to its credit, recognized that Fund G is not suitable for achieving retirement income goals. On Sept. 5, it changed the default investment option to an age-appropriate lifecycle fund instead of the G Fund for TSP participants who don't designate an asset allocation choice. The TSP's lifecycle funds in aggregate represented only 17% of the plan's assets at the end of September.
The Obama administration, in seeking to extend retirement program coverage, should have encouraged Americans without workplace plans to set up individual retirement accounts, a long existing program that offers many more choices to help participants achieve their retirement income objectives.
Instead it created an entirely new program, no doubt causing confusion among world-be participants, many of them unsure enough about planning for retirement. At the least, MyRA should offer a series of age-appropriate target-date funds, passively managed.
The Treasury Department's MyRA website promotes the program as “safe,” saying there is “no need to worry about your investment.” But it is providing misleading expectations. It will do little to help participants to achieve sufficient retirement income, and it does nothing to educate participants about contributing to their retirement plan and allocating their assets to achieve those goals.
The next Congress ought to revise MyRA to steer participants into age-appropriate target-date funds in the IRA marketplace, instead of continuing MyRA as its own retirement investment program. n