Bond drive

Since the federal government has performed so magnificently on healthcare, President Barack Obama wants to get it into the retirement planning business. “I will direct Treasury to create a new way for working Americans to start their own retirement savings,” he said in his State of the Union address: “MyRA. It’s a new savings bond that encourages folks to build a nest egg. MyRA guarantees a decent return with no risk of losing what you put in.”

The president then challenged Congress to offer “every American access to an automatic IRA on the job, so they can save at work just like everyone in this chamber can.” Under the new MyRAs, Americans can invest from $1 to $15,000 and be assured a return that would have been roughly 1.89 percent last year, and 3.4 percent over the last decade, according to recent estimates. MyRAs, like money invested in an IRA or in an employer’s pension plan, would be given favorable tax treatment. Until investors start taking the money out, they would not pay taxes on the earnings.

Now, any American can open an IRA, without help from Washington. So why do we need MyRAs and automatic IRAs? The justification for MyRAs is that many mutual fund companies, including Vanguard, require at least $1,000 to open an IRA. MyRAs would be retirement accounts for those who cannot afford an IRA, and they would also be automatic: Part of each employee’s paycheck would be withheld and invested in an IRA, although the employee presumably could ask his or her employer to stop the contributions.

That’s clever. As recounted in Nudge—a bestseller by Richard Thaler and Cass Sunstein, who subsequently worked in the Obama administration—studies consistently show that employees are more likely to contribute to retirement accounts if they are automatically enrolled and given the option to opt out, than if they are given the option to opt in. Employees have the option either way, but automatically enrolling them “nudges” the employee toward participation.

MyRA clearly has appeal in that Americans do not set aside enough for retirement. As the president pointed out, “a Social Security check often isn’t enough on its own.” If MyRAs and automatic IRAs change that, even a little, there is a lot to commend them. (Even if Congress does not mandate automatic IRAs, businesses are of course free to adopt this approach with their pension plans.)

But MyRAs have downsides: Their guaranteed return is much less than Americans are likely to earn if they put their money in a mutual fund IRA that invests in the stock market. Those who can afford the $1,000 minimum investment might be better off with an ordinary IRA.

Also, with automatic IRAs Congress or the employer would presumably determine the initial contribution level—say, 3 percent of the employee’s salary. This initial contribution might induce many employees who might otherwise set nothing aside to make the 3 percent contributions. But some studies suggest that employees who would otherwise set aside more than 3 percent—say 5 or 6 percent—may also end up simply accepting the default contribution.

Overall the moral is a familiar one: One size does not fit all. Americans are better off making our own retirement planning choices, rather than depending on the government or our employers to make those decisions for us.

—David Skeel teaches at the University of Pennsylvania Law School