Limited, modest performance – guaranteed!

This week the Treasury Department announced the long-awaited national rollout of a new program designed to make retirement saving easier: the “MyRA.

Basically, it’s a government-run Roth IRA that’s dead simple, easy to set up, and has no cost or minimum to open. The most unique feature is a guarantee against loss: appreciation is linked to a bond portfolio that promises steady, modest growth with no risk that your balance will lose value.

The program helps meet an important need for those who don’t have access to an employer-sponsored plan. It’s designed for employees of small businesses, and the growing ranks of independent contractors who might be revolutionizing the world of work through the “gig economy.” It even allows automatic deductions from a bank account, mirroring the regular payroll deductions of a 401(k) that do so much to boost savings. What’s not to like?

In this case, it’s the investment option(s) themselves. There’s exactly one, tracking the performance of the “G Fund,” a rather conservative Treasury bond fund. As we mentioned last week, investing too cautiously for your needs exposes you to the “other” kind of risk, that inflation will eat away at your assets and drag down your real return. It’s like going the wrong direction on one of those sliding walkways at the airport: if you don’t run, you’ll feel like you’re making progress when you’re really standing still, or even going backwards.

Looking at past performance, a MyIRA would have 3.19% over the ten years ending in 2014. You’d have beat inflation, barely, but also missed the biggest crash/boom cycle the markets have seen in a lifetime. That’s comforting if you don’t like excitement. However, the benchmark S&P 500 would have earned you closer to 6% over that time. While not everyone is totally invested in equities, almost all retirement savers need more than zero equity exposure, especially while they’re still working.

There’s also a cap of $15,500 on the total your balance can reach. Because the usual annual contribution limit of $5,500 still applies, an account can max out in just three years. At that point you’ll need to roll over to something else. We would recommend our own GuidedIRA, which is just as hands-off, but provides a portfolio optimized and managed for your individual needs over time.

These issues make MyIRA a short-term solution for a long-term need. We like the intention, and we love the automatic contribution feature. We only hope investors will see it not as a substitute for a true retirement plan, but as a convenient stepping stone to something more robust and flexible.