Low-Minimum Funds Well-Suited as myRA Alternatives

President Obama's plan to create a new retirement-savings vehicle called the myRA, introduced during last week's State of the Union address, was met with a mixed reaction among financial experts. 

Some say the concept is a step in the right direction in that it provides a way for those who lack access to an employer-sponsored retirement plan to get started on the important goal of saving for their golden years. Others, however, said the myRA, which would be invested solely in government bonds, will provide too low a return--in the range of 2%-3% at today's rates--to provide the level of growth required of such a savings vehicle. The accounts will be similar to a Roth IRA in that growth and distributions will be tax-free, and once the account balance reaches $15,000 it can simply be rolled into a Roth IRA.

One appeal of the myRA for those without 401(k) plans or other retirement savings is likely to be the low initial-contribution limit. For as little as $25, someone can open a myRA, and subsequent contributions can be for as little as $5 apiece. That might not get myRA users very far in saving for retirement, but it's a start.

However, for those who lack an employer-sponsored retirement plan but who have a bit more to save right off the bat, opening a Roth IRA may, in fact, be a better choice. That's because a Roth IRA can hold a much wider variety of securities and other investment types, with the potential for much greater returns over time. (A Traditional IRA also offers this advantage, plus an upfront tax deduction on contributions, but because those contributions cannot be withdrawn tax-free, as with a Roth IRA and the myRA, we'll use the Roth IRA for our comparison.) As opposed to the 2% or 3% annual growth one might see with the myRA, with a Roth IRA invested heavily in equities one might reasonably expect to see annual gains in the high single digits or higher during long periods of time. In fact, given historic inflation rates of around 3% annually, one could argue that the only way to grow retirement savings in real (after-inflation) terms might well be with a portfolio made up at least partially of equities.

For retirement savers with long time horizons--especially younger savers who are decades away from retirement--giving retirement savings a chance to grow is crucial. To illustrate, consider two investors, one of whom contributes $1,000 a year to a savings vehicle that averages 3% annual returns. The second investor makes the same $1,000 annual contributions but to a vehicle that averages 8% annual returns. The first investor reaches the $15,000 mark in the 13th year of investing, ending the year with $15,661 saved. By comparison, the investor with the more aggressive portfolio with 8% annual growth would have saved $21,697 by that time, or about $6,000 more.

True, the second investor would likely have to ride out the market's ups and downs, including the chance of a deep dive such as what we saw during 2008-09. But adding $6,000--or nearly 40% more--than the conservatively invested portfolio could very well mean a much larger nest egg down the road, especially for investors with many years until retirement.

One clear plus for the myRA is its low initial-contribution limit and the fact that contributions can be taken directly from employee payrolls. But with a little hunting around, investors with just a few hundred dollars to start saving for retirement, and who prefer a broader investment lineup that includes equities, should be able to find a Roth IRA option to their liking.  

Stocks and ETFs
One way to do this is to open an IRA (Traditional or Roth) through a brokerage account and use it to invest in diversified exchange-traded funds (investing in stocks or more targeted ETFs is possible but not advisable for retirement savers with few assets). Some brokerages charge minimums to open an IRA. For example,  Charles Schwab (SCHW) requires a $1,000 minimum balance to start but waives this requirement for investors who set up automatic monthly transfers of at least $100. Others, including  TD Ameritrade and E*Trade , require no minimum to open an IRA. However, one drawback to this approach is that the brokerage may charge a commission each time you contribute money to the account, so if you plan to contribute small amounts throughout the year, this probably doesn't make sense. If, however, the brokerage offers commission-free trades on some investments--such as the  Schwab U.S. Broad Market ETF (SCHB) or  Vanguard Total Stock Market ETF (VTI)--that will work for you, this could be a viable option for your IRA. Also, before opening an IRA through a brokerage be sure to ask whether it charges any fees for doing so.

Target-Date Funds
Another advantage of saving through a Roth IRA as opposed to the myRA is that it allows investors to use target-date funds, all-in-one portfolios of securities specifically designed for investors who expect to retire in a given year. By choosing an appropriate target-date fund, Roth IRA investors can own a well-allocated portfolio of equities, fixed-income securities, and other investments in one tidy package, with the risk level ratcheting down as they approach retirement (for more on how target-date funds work, see this video). 

Some fund companies offering target-date funds require minimum IRA balances of $1,000 or more to start, including the Gold-rated target-date series offered by  T. Rowe Price Group (TROW) and Vanguard. For investors willing to wait until they have enough saved to meet these minimums, these no-load target-date funds are fine choices. But for those who have only a few hundred dollars to start, a handful of analyst-recommended target-date series have IRA initial minimums that are even lower. All three carry Silver Analyst Ratings but may charge a sales load.

Target-Date Series With Low Initial Minimums
Target-Date Series	IRA Initial Minimum	Expenses *
American Funds Target Date Retirement Series	$250	0.74%-0.76%
JPMorgan SmartRetirement Series	$500	0.95%-1.00%
MFS Lifetime Series	$250	1.00%-1.06%
* For A shares

Other Options
For investors who don't like those options, a well-diversified equity and/or bond fund with low IRA minimums may fill the bill. But if owning more than one fund is a problem because you can't meet the IRA minimums for each but you still want stock and bond exposure, you could consider an allocation fund that owns both. You can find a list of conservative-, moderate-, and aggressive-allocation funds with Bronze or better Morningstar Analyst Ratings and IRA initial minimums of $500 or less by clicking here (Premium Membership required). Be careful to read the fund's rules before opening an IRA, however. For example, Gold-rated  FPA Crescent (FPACX) allows investors to open an IRA with just $100 but requires that they increase that amount to $1,500 within 12 months. 

Finding a low-minimum IRA alternative to the myRA shouldn't be difficult given the aforementioned strategies. But in all cases those starting to save for retirement need to pay close attention to fees--including commissions, loads, and expense ratios--so that they are able to keep more of their retirement savings for the long run.