When you think about it, should we be all that impressed with Reese’s Peanut Butter Cups? They’re certainly delicious, but was it really such a stretch to combine chocolate (good!) with peanut butter (good!) and discover that putting these two good things together created a new thing that tastes good? Because that pretty much seems like the entire idea of cooking.
The real challenge would be to combine two horrible things and somehow create something wonderful, like mixing Brussels sprouts into oatmeal and discovering that instead of making the most disgusting breakfast cereal of all time, you’ve inadvertently concocted a great new taste sensation. Not that I, personally, am going to try this particular combo, but I am trademarking it in case the Hot Pockets people get any ideas.
But there is a place where two really lousy things could be combined to create something terrific, and it exists right here in the world of personal finance.
The first is President Barack Obama’s new myRA retirement account, an IRA on training wheels that has generated less buzz than a dead mosquito. The second is a really and truly crappy institutionalized rip-off from the financial “services” industry known as “forced IRAs.” Putting these two together could save U.S. investors millions in excess fees each year, even though the idea sounds about as appealing as eggplant ice cream.
myRA to the rescue!
A forced IRA is what happens when you quit a job and leave less than $5,000 in a 401(k) workplace investment account. To avoid the cost of administering the orphaned account, your ex-boss can have it dumped into an IRA, but that IRA can invest only in low-paying money market accounts or certificates of deposit. That’s bad enough, but then the financial services firms that run these plans hit your little orphan account with fees big enough to run a $1,000 balance down to $0 in less than 10 years.
This is where the myRA could come in. Financial experts have greeted the myRA with all the enthusiasm you’d expect to see for a carpeted bathtub. The myRA is a very simple, entry level Roth IRA, where after-tax dollars are contributed, starting with as little as $25 and $5 from each paycheck.
The big drawback to the myRA is that there’s only one investment option: a government bond fund that averaged a 3.39 percent return from December 2003 to December 2013. The other is that no private employer has signed up to offer the myRA, meaning people have to discover it on their own, which is unlikely to attract the workers who need it the most. You also have to have a directly deposited paycheck to participate.
Personally, I think the myRA could be a good on-ramp to retirement investing, but it needs several tweaks — and a lot more publicity — to really work for people who aren’t already in another workplace retirement savings plan.
But where it would really work is to change the rules on 401(k)s so that orphaned workplace accounts can’t be forced in to traditional IRAs, but go directly to a myRA. That’s because you can’t lose money in a myRA, making them very safe, and there are no annual fees for the account. Yes, it won’t grow by a lot, but it won’t get entirely eaten up by fees, either.
Putting onus on advisers
Of course, getting the tax rules changed so that old 401(k)s convert to myRAs could be tricky, and that’s where new rules proposed by Obama and the Department of Labor come in. These rules would require financial advisers to adopt a “fiduciary” standard when it comes to helping clients manage their IRAs.
Advisers are screaming like pigs being forced away from the trough at the thought of being legally required to dispense advice that creates the best investment for the client instead of maximizing their own fees. That screaming is being heard by Republic and Democratic Congress members who likewise fatten up on campaign donations derived from those excessive IRA fees, and the new rules have already been sidelined until August in the House of Representatives.
But aside from the financial services industry, most consumers, voters and others back the change. In fact, most consumers are stunned to find out that some advisers DON’T have to put their best interests first. If the law passes, it would be easy to substitute the myRA over a forced IRA as a simple extension of the fiduciary standard. If the new standard doesn’t pass, tackling just the issue of forced IRAs through a new Labor Department rule would involve less push-back from the finance industry, since abandoned 401(k) plans total only about $8.5 billion vs. $7.6 trillion invested in IRAs.
So, here’s hoping the president or someone in his administration will try to cook up this idea for boosting the acceptance of myRAs and ending a terrible consumer rip-off. Because leaving things as they are now is nothing but a recipe for failure.
Brian O’Connor is author of the award-winning book, “The $1,000 Challenge: How One Family Slashed Its Budget Without Moving Under a Bridge or Living on Government Cheese.”