Backers of the robo advisor model are catering to younger, middle-income and self-directed investors who are left unserved by the RIAs sector.
So is the federal government.
On Tuesday, Treasury Secretary Jacob Lew announced that the administration's "myRA" retirement plan will be available nationwide, with an expanded menu of funding options.
The myRA plan, which President Obama unveiled in his State of the Union address last January, aims to encourage people to take the first step toward planning for retirement through modest contributions to a secure Roth IRA that carries no fees or minimum balances.
"We have been very clear that this is a start and not a finish," Lew told reporters on a conference call. "One thing we know is when people start saving there's a good chance they'll continue, and the challenge is to get started in the first place, to create a habit of saving."
With the robo model, a growing number of startup tech firms and established players alike are trying to deliver light-touch advisory services to investors who might not meet the minimum requirements for a traditional RIA account, but who, collectively, account for trillions of dollars in investable assets.
The digital advice market in fact is expected to grow to nearly $500 billion in the next four years, according to a new report from Cerulli Associates.
The government is targeting a similar cohort with the myRA initiative, billing the program as an attractive option for workers who don't have access to a 401(k) account through their employer, and might be deterred by fees or minimum balance or contribution requirements that come with many private retirement savings vehicles.
Indeed, the no-fee, no-minimum balance features proved the most popular aspects of the program during the myRA's trial phase, according to Treasury officials.
During that pilot program, the Treasury Department worked with a select group of employers to make contributions to the government retirement plan available through the company's direct-deposit program.
Now, with the nationwide rollout, the DoT is also allowing savers to fund their myRA account directly through their checking or savings account, or by contributing all or a portion of their federal tax refund.
The Treasury Department bills the myRA program as a no-risk investment option, with contributions invested in U.S. Treasury savings bonds that earn the same interest rates as the Government Securities Fund set up for federal employees. That fund netted an average annual return of 3.19% over the last 10 years, and around 2% last year, well over the near-zero rates that retail checking and savings accounts typically offer, Lew notes.
The myRA program follows the same eligibility requirements and annual contribution limits as other Roth IRAs, but has a maximum balance of $15,000. But Lew explains that the program is intended only as a start, designed to spur people to begin saving initially before moving on to a more traditional retirement account available through the private sector.
"We would never argue that $15,000 is adequate retirement savings, but you've got to go from zero to $15,000 before you can really get into the habit," Lew says. "Getting people started, getting people into the habit is the kind of change in behavior that leads to the build-up of a more significant retirement cushion."
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