Why MyRA Retirement Accounts Will Be Good, But Not Great for the Middle Class

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On Tuesday, President Barack Obama announced plans to unveil a new retirement investment option for Americans in lower income brackets. Promising "a decent return with no risk of losing what you put in," Obama seems to be banking (pun intended) on a bond-based system similar to Roth IRA systems to support his stated goal of expanding the middle class once more. With an anticipated roll-out date of late 2014, Obama has left himself little time to accomplish a huge goal.

The good...

The plan may not be a new "better mousetrap," but there are benefits in the long term for those who choose to enroll. For many, the MyRA system will represent the first time many will even have access to retirement funds. Considering an estimated 50% of all full-time workers and 75% of part-time workers are not saving for retirement, according to Business Insurance, the MyRA system may represent a new paradigm for an aging American population. 

The theoretical basis of MyRA is a bond similar to a traditional U.S. savings bond, making the plan relatively safe. Short of a complete financial meltdown, all investments are relatively secure in the long term.

The plan is also extremely affordable, requiring an initial minimum investment of only $25 and subsequent deposits of as little as $5. There are limits to annual contributions to the account, capped at $5,500 per year (similar to the inspirational Roth IRA system), but the system is expected to have no administrative fees, permitting money invested to go further.

Finally, the new system costs nothing to small businesses enrolled in the process. With a plan that follows all participants from job to job, those who enroll in the system gain a measure of long-term financial stability. 

In short, if lower-income families want a way to save money that is a sure thing, this plan is the way to go.

The not so good...

With a system based purely on bond interest, the system is not designed to make investors independently wealthy. An example generated by Libreprensa paints a bleak picture:

"With an average 2% interest rate, for example, a worker contributing $100 a month would accumulate around $6,300 in savings after five years, including around $300 in interest."

While a positive step in guaranteeing future funds, the low interest rate will cause investments to suffer heavily against even moderate inflation over the long term. This is moderately combated by the ability of the private citizen to shift a MyRA account to a standard Roth IRA when the balance hits a set amount (currently denominated as $15,000), but to attain this level will require the common citizen to invest heavily to overcome this hurdle. This may prove difficult considering the limited incomes of those this program is created to assist.

Another not-so-good feature resides in the nature of the organization overseeing the implementation of the program. According to a Treasury brief released Wednesday MyRA, despite being a government brainchild, will be overseen by a firm-to-be-named in the future. While the firm will be expected to possess extensive experience overseeing Roth IRA style accounts, the selection of an external entity does add an additional layer of bureaucracy that may cause complications.

Finally, while the experience handling Roth IRAs will be beneficial in understanding the new system, the program itself is not going to be perfectly analogous. A potential learning curve may complicate matters.

The bottom line...

The MyRA program is not the panacea for an extremely complicated retirement system. It is not even the perfect solution to achieve the president's goal of expanding the middle class. But it is a strong initial step in securing long-term finances for a large percentage of the American workforce.

With the ability of participants to withdraw all deposits penalty free, the program permits a "rainy-day fund" that many part-time and hourly wage workers need. The ability to switch MyRA funds to other manners of investment funds also permits flexibility at the cost of return on investment. 

It's not perfect but it's functional. The real test comes further down the road once some of the program's unknowns are worked out.

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Kurt Avard

A January 2014 addition to the Motley Fool team, Kurt Avard prefers to focus on the "dark" side of business and how it interacts with politics. Rarely writing on the same thing twice, he feels that, if he manages to convince you that the two are inexorably linked, he has adequately done his job. Follow him on Twitter @kurtsavard

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