Obamacare for Your Retirement Plan?
Well almost, if the President has his way again. As if foisting Obamacare upon us wasn’t quite enough, it looks like Obama is working to make his last years in office count. Here is what’s going on, his latest plan to fix the abysmal savings rate in this country.
Training Bra or Head Start?
The new savings initiative being proposed by the President is what he dubs the MyRA. You will note that the name seems to be deliberately chosen to sound suspiciously similar to IRA. However, you should take a look at the details and decide for yourself.
The Fine Print
The MyRA is touted as an option for those employees who lack access to an employer sponsored 401K plan or pension. These accounts will be set up by the U.S. Treasury Department and will be limited to a single investment choice, that of U.S. savings bonds. The plans will be setup to pull payroll deductions directly into the MyRA account. There is also language requiring the balance has to be rolled over into an IRA account after a maximum amount is reached. Not only that, there are big restrictions on cashing out these accounts before retirement. These limitations are similar to restrictions on early 401K withdrawals.
Hands-OFF Does Work
You can see the logic behind this plan if you take a minute to understand some basic psychology. As you may know, most everyone suffers from inertia. Take a look at this example. If you are sitting at home enjoying a great Netflix movie, you know the feeling of wanting a snack. But to grab the snack, you have to overcome your inertia of being sprawled out all over the couch. You have a little battle going on inside your head over the desire for a tasty snack or the desire to just stay put.
Not surprisingly, the exact same thing shows up in the personal finance world. It takes what seems like a tremendous amount of discipline to write a check for your investment fund every month. On the other hand, if your investments are automatically deducted from your paycheck or checking account, its no big deal. In fact you probably congratulate yourself for being such a responsible investor even though it is in one sense being done for you.
Understand that this applies to everyone. Academic studies have examined behavioral response. Researchers note that the initial inertia of doing nothing is easier to overcome if someone else starts the ball rolling for us. For example, when you first learned to ride a bike, most likely someone helped get you rolling the first time you pulled off those training wheels. Similarly, the President’s MyRA plan looks to be designed to help get the ball rolling.
Reaction from the Peanut Gallery
Interestingly, the responses so far from the so-called Big 3 retirement firms are a bit muted. Vanguard, the granddaddy of self directed investment accounts expressed overall support. Fidelity Investments, the acknowledged largest provider of IRAs, and JPMorgan Chase both declined to comment. Things that make you go “hmmm.” Perhaps the big 3 are concerned about some investment dollars being diverted to these new MyRA accounts?
A Cynic Says Look at Another Viewpoint
What is really going on here? At first glance, it certainly seems that our President has good intentions in mind. He notes that a certain percentage of the working population doesn’t really have access to regular retirement savings options. Additionally, since this plan is set up for payroll deductions with very low minimum amounts, it may indeed be what some people need to start the savings habit.
At the same time, perhaps there is another side of the story. If you inspect the details a bit closer, you will quickly hone in on the point that the investment options are extremely limited in a MyRA plan. Actually, there is only one investment choice—U.S. savings bonds.
If you want to take a walk on the dark side for a moment, a cynic might suggest Obama is promoting a MyRA plan to get people to invest in U.S. savings bonds. This cynic would go on to point out that our country is trillions of dollars in debt, and this is just a sneaky way to keep funding the debt. Perhaps that’s a bit extreme. Of course, you should decide for yourself.
Whether you need a MyRA or not, make sure you get the real point of this personal finance article. Beware of your own inertia and the extreme effort it takes to overcome any habit, good or bad. As illustrated above, you can take care of that with automatic plans whether its through your 401K, automatic deductions from your checking account or perhaps even your own MyRA account
So what’s your take on this? Is the President’s MyRA a good investment choice or something else?