More concerns about ‘Defined Contribution Plan’: Part 3

Let’s take a look at page 10, lines 15 through 27. This section mandates the administrator to rely solely on uniform fees and “shall not plan for or request an appropriation” from the general fund (after the second year). It also mandates the administrator to contract with a third party to provide a host of functions associated with administration of the plan and to pay public employees and private contractors. Where does that money come from? You guessed it—from you (or more precisely your contribution to your account).

Page 16, line 6 at least mandates the employer to fund the cost of insurance for disability and death benefits. Most fund administrators end up using about .05 percent to no more than .1 percent of your assets to effectively administer your account. It will be quite interesting to see just how much of your assets will be eaten in this plan. I don’t like to make prediction number 49, but I’ll guess this plan will eat up at least 10 times normal costs. Let’s come back in four years and check it out!

Go to page 11, lines 26 & 27 continued on page 12, lines 1 to 3: This mandates that any employee who retires or separates from government service (presumably having been under the current system before separation) and then returns to government employment shall only be eligible for membership in the “new” plan and shall not return to the “old” plan from which he/she came from. This is worrisome because I don’t know if this could be applied to “contract” employees whose yearly contract expires and then is renewed the next day for another year. Does this constitute “termination” and “renewal” of service, thereby immediately divesting the employee of his retirement fund and switching him/her to the “new” plan overnight?

Another concern is on page 18, lines 16 through 25. It states the employee will be immediately vested in his/her OWN contributions but will not be fully vested in the government’s share for five years! There are a number of ramifications to that provision. Such as, what if I quit service after four years and want to take my “portable” plan to another employer? What will happen to the government’s share that is not vested yet? What a nightmare it could be—and why? Can someone please explain this?

Page 20, lines 1 and 2: “A member is eligible to elect distribution of the member’s account in accordance with this section 60 days after termination of employment.” There are built-in exceptions to the 60-day wait under conditions of extreme hardship—but why the wait in the first place? Pre-planning should be able to have the first payment out in 30 days. It would nearly always constitute a “hardship” to wait for 60 days just to become eligible to elect a distribution and then wait again for paperwork to be done and the first payment issued just because some administrator has the “option” to consume 60 days or more.

And one last entry; Page 23, lines 18 to 20: “(5)…a participant whose account has a balance of $1,000 or less meets the requirements of §8466, at which time the participant must take payment of the participant’s account.” I don’t know about you, but every tax deferred IRA I ever saw carried a stiff penalty of at least 20 percent for early termination or withdrawal—in addition to the required taxes. How will they reconcile this?

At the very beginning of the Act, it is stated that this “new” retirement system shall be the only retirement plan offered by the CNMI government to its employees—and that this plan is nothing more than an IRA. Right there we have a problem. Go to just about any financial manager or planner anywhere and they will invariably tell you that to have only a single IRA type retirement plan in your portfolio is financial folly of the worst kind. It will lead to an entire generation of elderly with no means of support. History has already shown that only a small percentage of employees have the ability or means to successfully put away more than the single involuntary “nest egg” over the course of their working lives. Is that what we want for our children?

In a letter to the editor about two weeks ago, I responded to Mr. Tony Muña’s plea for “solutions” with what some felt were realistic changes to the current retirement system that could make it a viable system for the future. Thank you Mr. Bill Stewart for your support for those suggested “solutions.” However, it appears that our government is dead set on a tangential course toward retirement destruction. So be it; you get what you pay for.

In the last of four parts, I’ll talk about some possible alternatives. Good luck!

Dr. Thomas D. Arkle Jr.,
San Jose, Tinian