So the other night President Barack Obama spoke on many different issues (first starting off which how a teacher worked extra hours) and then moved on to income inequality and talked about how this was the year of action. However, what caught my attention was a program he wanted to push forth called myRA. Note that this would actually the program would actually be passed by Congress before actually becoming part of the ever expanding tax code. How myRA works by guaranteeing "a decent return with no risk of losing what you put in". Let's step back a second to understand how false/hypocritical this statement is. Investment management companies and firms are highly regulated by the SEC. If any investment firm had this as advertisement they would be investigated by the SEC and charged with misleading advertising and possibly shut down (however when a government that is already going broke states it there is no issue).
The WSJ lays out how this would actually how myRA would work. The account would just allow for one investment (most corporations and companies that have 401k plans have options-under federal ERISA rules plans have to offer at least 3 investment choices- so choice is obviously not part of the plan). The principal is "protected" however to my knowledge inflation could erode this away as the bond is not adjusted for inflation. What the government is offering is a Treasury bond that will offer a variable interest rate (fluctuates with present day interest rates). The annual return from 2003-2012 is not great of only 3.61% (however the President did mention how the stock market had done well yet this new program wouldn't let people participate in it). Vanguard ran calculations and said if you put away $50 every other week for 11 years you would have $15,000 which does not solve any type of retirement crisis. The cherry on top of this regulatory sundae is that once the balance reached $15,000 participants would then be required to roll over the funds to an IRA at a private sector financial services company (think Fidelity or TD Ameritrade) and then could select a variety of options. I could only wonder who would be lobbying for this to actually become legislation.
According to the American Benefits Council there are over 650,000 401k plans. There are roughly 88 million participants in these plans. In my experience some people don't trust 401k plans for a few reasons 1) They don't trust a 401k plan 2) They would rather spend the money or 3) They don't understand a 401k which leads them not to invest in it.
If the President actually did some research he would find that most companies do in fact offer 401k. In a survey done 98% of companies surveyed companies already offer a plan with an employer match. In addition to this companies are also simplifying the investment options, providing more investment education, and increasing the employer match. There are many regulations that surround company benefits including 401k plans. For instance any employee that works more than 1,000 hours in a 12 month period of eligible for a 401k. Essentially 401k plans can't be non-discriminatory (they have to be offered to at least 70% of the people who are eligible). This has to do with non-discriminatory laws that govern company plan benefits. People also forget that when a company matches an employees contribution that is essentially free money. Companies also have to hire plan trustees, custodians, and sometimes investment advisors who are themselves highly regulated by the SEC which does cost money.
The obvious course of action is to stop providing programs such as Social Security that let people on to believe they are okay in retirement. If Social Security wasn't around would people be more or less prudent with their saves. The current taxation on Social Security is actually over 15% (if you include the employee and employer portion). Not only is Social Security taxed when you paid in but also the benefits are taxed as well. Martin Feldstein from Harvard has done some work in this area and actually found that Social Security reduces private savings by roughly 60%. Social Security is a whole different issue that I won't blog about here but the default program let's people sleep at night when in actuality they could manage their own money or hire a financial advisor to help them.
In summary, the President is proposing a retirement plan for people with little to no means when nearly 50% of people already live paycheck to paycheck. According to the report 44% of Americans are living with less than $6,000 in savings for a family of four. Now there are people who through their own misfortune or bad luck can't work and therefore can't save but that is a very small fraction of the overall population. I would be okay with even cutting these people a check and letting them at least decide how they use their resources instead of having a bureaucracy decide for them.
Many people choose not to pay attention in class during K-12 education, choose not study hard, choose to go out and party, get a job and choose not to put in the extra hours needed to get a promotion, choose to have children before they are financially ready, choose to spend money on things they possibly might not need (do you ever wonder how many people at the Cheesecake Factory really can afford it?). The right approach would be to get rid of the ridiculous burdensome laws that govern 401k plans (custodian, fiduciary, bookkeeping, etc.) in order to allow more companies (manly small businesses to offer them). The President seems to be separated from reality as he has never had to answer to customers, shareholders, or had any serious type of accountability.
In summary, the President is proposing a retirement plan for people with little to no means when nearly 50% of people already live paycheck to paycheck. According to the report 44% of Americans are living with less than $6,000 in savings for a family of four. Now there are people who through their own misfortune or bad luck can't work and therefore can't save but that is a very small fraction of the overall population. I would be okay with even cutting these people a check and letting them at least decide how they use their resources instead of having a bureaucracy decide for them.
Many people choose not to pay attention in class during K-12 education, choose not study hard, choose to go out and party, get a job and choose not to put in the extra hours needed to get a promotion, choose to have children before they are financially ready, choose to spend money on things they possibly might not need (do you ever wonder how many people at the Cheesecake Factory really can afford it?). The right approach would be to get rid of the ridiculous burdensome laws that govern 401k plans (custodian, fiduciary, bookkeeping, etc.) in order to allow more companies (manly small businesses to offer them). The President seems to be separated from reality as he has never had to answer to customers, shareholders, or had any serious type of accountability.
