When President Obama announced a plan in his State of the Union address for a new government retirement savings program called MyRA, my ears perked up.
As you probably know, the vast majority of Americans are not saving enough for retirement. Clearly a remedy is needed—and here at Betterment we applaud Obama’s initiative, which would target the retirement gap among lower balance savers by offering MyRA starter accounts.
As this potential new savings program is still taking shape, we’d like to weigh in. After all, Betterment has been working on a smarter way for all Americans to save for retirement since 2010—by leveraging innovative technology to cut the costs of investing and by incorporating research in behavioral finance. Only through a combination of these two considerations can we tackle this problem.
The result is that Betterment offers an IRA that is already light-years ahead of what’s being proposed for the MyRA savings plan.
The MyRA plan would offer lower-wage workers accounts invested in, basically, U.S. savings bonds. While that’s a nice windfall for the government, it’s far from being the best strategy for people who need to maximize the performance of every dollar they save.
Just because you’re in a lower tax bracket doesn’t mean you need to ride a bike that only has one gear. Risk should be tied to your time horizon, not your balance. Thus far the MyRA plan seems unnecessarily limited–and limiting–to those who most need a more efficient tool for building wealth and capturing the potential of the market.
For example, the Betterment platform offers a globally diversified portfolio of low-cost ETFs, and automates many of the tasks that can potentially undo savings. And the Betterment method uses sophisticated algorithms to enable any customer—whether his or her balance is $8,000 or $8,000,000—to access the best possible risk-adjusted returns.The Betterment method uses sophisticated algorithms to enable any customer—whether his or her balance is $8,000 or $8,000,000—to access the best possible risk-adjusted returns.
We have no minimums to open an account and the Betterment portfolio is extremely low cost. The MyRA promises some of these advantages too, but why stop there? The success of the Betterment method has shown that we can drive both investment returns and investor returns, and there’s no reason to limit American workers to low-yield accounts.
That’s why a true solution to the middle class savings crisis needs to be a holistic one that combines diversified, low-cost investments along with advice and behaviorally driven automated parameters that help people invest optimally.
When I started Betterment, my vision was that every investor—no matter their net worth—should have equal access to the best investing strategies. The nature of software makes this possible. The Betterment platform’s design is successfully narrowing the behavior gap, by quashing investor behavior that sabotages returns.
We take great efforts to expose customers only to the information that is necessary to make smart choices. We build “smart defaults” into the platform, encouraging wise–not impulsive–decisions. We encourage auto-deposits, because savings is more likely to happen when it’s automated. We don’t surface daily volatility of the portfolio, because our minds tend to overvalue its impact.
Many of the insights behind the Betterment philosophy were described in Nudge, co-authored by Cass Sunstein, an old University of Chicago colleague of President Obama’s. We know that Sunstein influenced Obama’s thinking on policy (he eventually appointed Sunstein head of the White House Office of Information and Regulatory Affairs).
We can’t help but think that Sunstein and Obama would agree that the solution to the middle class savings crisis has to look deeper and broader than making a few tweaks to a business-as-usual savings bond account. At Betterment, we have been busy building the next generation investment product (and we don’t have to get Congressional approval). If anyone from the White House wants to talk, we’re available.