Obama's MyRA Plan might lead Horses to Water...but...

At his recent State of the Union Address, President Obama discussed his plan for helping low to middle income Americans save for retirement by creating the MyRA.  Since then, as more details have been revealed, many journalists have written about this savings vehicle, which is slated to be available in the coming months.

A nice summary of the plan, with opinions that I largely agree with, is found here.

Basically, the MyRA will be set up like a Roth IRA.  Roth IRAs allow investors to invest after-tax dollars and withdraw the money in retirement tax-free.  There is no immediate tax benefit for investing today, but your investment will grow tax-free and withdrawals (at age 59 1/2 and older) will be tax-free.  Depending on your current and future tax brackets, Roth IRAs can be the best type of retirement vehicle.

However, the MyRA will have limited investment options.  These accounts will solely invest in government savings bonds, and will be backed by the U.S. government, meaning that savers can never lose their principal investment (protected like with FDIC). Don't be fooled into thinking that because the principal is protected, you will be free of risk.  The MyRA will pay the same variable-interest-rate return offered by the G Fund, the Government Securities Investment Fund in the federal employees’ Thrift Savings Plan.  In 2012, this fund's yield was 1.47%.  Inflation over that same period (as measured by the CPI figures) was 2.08%.  Purchasing power risk is a very real threat to this type of account. 

The MyRA accounts will stay with you when you switch jobs or contribute to the same account from multiple part-time jobs. The MyRA will be free of all administrative fees.  The balance is capped at $15,000 -- this is truly geared toward low to middle income Americans.  After that (or once it has been opened for 30 years), the owner has to roll it over into a Roth IRA (they can do this anytime). 

Contributions can be withdrawn at anytime without penalty. However, anyone who withdraws the interest they earned in the account before age 59 1/2 will be forced to pay taxes on withdrawals and will possibly owe a penalty, just like a Roth IRA.

All in all, I don't really understand how the creation of this new retirement plan will help Americans save.  The tax incentives already exist with Roth IRAs.  Middle and low income Americans are already eligible for these plans.  Guaranteeing the principal and eliminating administrative fees are benefits, but the low return likely makes this a poor investment.  For comparison, the Barclays iShares funds that match the G Fund most similarly are the iShares Barclays 7-10 year T-Bond fund (ARCA:IEF) with an average maturity of 8.38 years, and the 10-20 year T-Bond fund (ARCA:TLH), which has an average maturity of 14.36 years. You can compare these funds' returns to the S&P 500 or any other market proxy to see for yourself how badly it has fared in the long-run.

The returns on the MyRA might be low enough to disappoint investors and discourage them from further saving in general.  Worse yet, by capping the account's value at $15,000 we might give some Americans the idea that $15,000 is savings enough for retirement. 

Can we come up with a better incentive for Americans to start saving for retirement?  Especially younger Americans, for whom Social Security may not exist to help?  What about a government matching program?  Or an incentive to actually go ahead and roll over that $15,000 into another retirement vehicle rather than spending it?

What ideas do you have?