These articles, supported by input from Mr. Bill Stewart, a former and highly regarded TT and CNMI economist, examined the problems with the Defined Benefit Plan, or DBP, and many unanswered questions regarding the proposed Defined Contribution Plan or DCP. They offered a series of possible solutions to the recognized upcoming demise of the DBP and proposed what the economic future of CNMI government employees should look like when retirement-time arrived for those enrolled in the “new” DCP and those retiring under the “old” DBP.
As was stated in my second letter of the series: “Now, I’m no economist, or CPA, budget analyst or other expert in this field. But I do possess a high degree of education and the ability to see logic in pathways to an end.” There were “predictions” made at the time, and after re-reading those old letters, those predictions have not only been fully borne out —but are arriving faster than a speeding train, without jumping over the tall building, but rather plowing right through it and leaving in its wake the inevitable chaos and very personal damage. Not a single word or paragraph of that series was given more than a passing glance and even the pearls of wisdom dropped at the feet of the CNMI’s “leaders” by Mr. Stewart caused not a second thought. Instead, all were seen as little more than rocks of disdain (“sour-grapes”) hurled by “outsiders” against the righteous providers as “locals” (Muna, Inos and Fitial) purported to know what was best for other “locals” (employees) and promptly enacted it into law without so much as a whimper.
Now, CNMI government future and present retirees are reaping the fruits of what was wrought by years of self-righteous indignation. There was and is plenty of blame and finger-pointing to go around but this letter will not indulge in such. Suffice it to note the recent events that overshadow the onslaught and divisiveness amongst various groups jockeying for position as the DBP goes through its death throes. Even retiree groups themselves seem to be flopping and floundering along the various trails of ending with no clear goals in sight. This, accompanied by the cacophony of unending ineptness from a legislature full of pretending pseudo-economists, resembles the profound foreplay frolics by a shiver of sharks circling the prey — and that prey is YOUR future livelihood. No matter who does what for the future of the DBP, it is winding down amongst a flurry of mindless legislative promulgations and court decisions sure to end up dawdling in “the system” for years to come, all being flung, of course, by mostly reprobates saddled with ginormous (and unrecognized) conflicts of interest, upon the masses of mostly confused, misanthropish sheep. Meanwhile, retiree payments will soon end when the fund reaches “0” and all the swaggering and all the fairy-tale endings promised by, well…fairies, will be moot.
But what do employees in the DCP have to look forward to? Remember, the DCP was touted, in 2006, as “The Answer” to future retiree dreams of life after work. I have tried in the last few weeks to find out about the DCP; how it’s working, how employees are faring under it, what to expect, etc. Instead, I have uncovered precious little about it and that alone forebodes misgivings of outrageous enormity — and consequence. I can only imagine what the average government employee knows about it. It is further unimaginable how the average employee is supposed to “administer” it. What? You didn’t think it was something YOU had to do? You actually thought the “government” was gonna do that for you? Fact is, the DCP is YOUR INDIVIDUAL IRA account — it is NOT a conventional retirement account at all — never was and never will be! According to “CNN Money Matters,” “The Economist” and various GAO reports, there has been widespread conversion over the last 20 years FROM DBP’s to DCP’s.
Simple reason: It’s “CHEAPER.” However, many large companies AND governments (local, state and federal) maintain a re-structured DBP as well as a voluntary DCP (just under 30 percent according to “The Economist”) if for no other reason than to avoid a general employee rebellion and future implosions of assistance programs that will come to be relied upon by those retiring without sufficient benefits.
But this local government decided in 2006 to have only ONE plan: the DCP, and thus it came to be: MANDATORY! The DBP was supposed to be phased out in an orderly manner until there were no more existing beneficiaries — we all know how that has worked out so far. OK, so let’s get down to brass tacks: How will I fare with the DCP as my ONLY retirement vehicle? Perhaps that answer is partially held by the following Office of Public Accountability report issued by Guam and reported in the March 11, 2011 edition of the MV-Guam by Janela Buhain:
“Defined Contribution Plan members within the Government of Guam Retirement Fund will not have enough to sustain themselves in the future when they plan to retire, according to the latest audit by the Office of Public Accountability.
The audit, conducted by independent auditors Burger & Comer P.C., states that although the retirement fund saw an increase in net assets in both its Defined Contribution and Defined Benefit Plans, DC members will “not have enough saved to generate a reliable stream of retirement income.”
With DC member balances averaging $40,000, current members will not have enough to support their basic needs and maintain a comfortable standard of living for their retirement, the report states.
“If members are left without adequate income when they retire, the government of Guam may find itself subsidizing their costs of living through public assistance programs,” the report said.
This is because the DC plan provides “no guarantee” of benefit, the report states, unlike the DB plan which provides a guaranteed retirement benefit for the life of the member.”
Alarming? You think “Oh, this only applies on Guam!” Well, think again. The CNMI DCP is managed by “ASC Trust Corporation” — a GUAM corporation that manages many of the DCP’s in the Pacific area. It was founded in 1990 and if THEIR DCP average account now holds only $40,000, what does the average account of a CNMI member hold since its much later inception in January 2007? I have tried to find information on the number of enrolees, their average contributions, their average account amount, whether CNMI employees can “manipulate” their accounts on-line among various funds and a whole raft of expository questions — to NO avail! ASC Corp. currently manages around $320 million in accounts for over 100 employers. A VERY small firm, by retirement standards, with an average of only about $1 million invested PER employer.
I’m not going to confuse anybody by giving you a bunch of arbitrary and complicated figures, but here are a few basic ones:
A “modest” retirement living now costs a retired couple about $27,500 per year (that’s REALLY modest), so whatever your retirement vehicle is, it must be able to produce that much income for you for twenty or more years.
A person just starting his/her career in, say, 2000 and joining the DCP in 2007 and working a normal span will probably retire in 2037 or so.
Allowing for NORMAL price and goods inflation, that $27,500 will be the equivalent of $58,200 in 2037 and (here it comes) OVER $120,000 (ref: CNN Money 101) per year by the time you die in 2057! Will you be able to retire after 35 years of work? Will you be able to sustain yourself for 20 additional years?
From “The Economist,” April 2011: “Even employees in their 60s who had been members of DC plans for 30 years had accumulated pots of less than $200,000, enough to generate a sustainable income of perhaps $10,000 a year. That is not a huge reward for 30 years of thrift. Seth Masters, chief investment officer of Alliance Bernstein, puts the numbers in perspective: “If our industry is to be successful [in generating a decent pension], people have to be retiring with pots of $750,000 to $1 million.”
“The Economist” also points out: “The danger is that employees will underestimate the size of the pension pot they need and overestimate the investment returns they will achieve.” And: “With a DC pension, nearly all the risk is passed to the employees. James Poterba at the Massachusetts Institute of Technology, points out that a DC plan forces them to make a set of decisions, such as their contribution rate and their asset allocation, for which they may not be equipped. “A very large proportion of the population has no interest, knowledge or time to direct their 401(k) plans. They are known as the unengaged majority,” says Kristi Mitchem of State Street Global Advisors, a custody and fund-management firm.”
Question for you: “Will the current CNMI DCP accumulate a “pot” of this magnitude for YOU from your contributions, the government’s contributions and “growth” by the time you retire?” Fact: For most, it will not even come close. Another fact: DCP accounts have a FINITE amount of funds in them — and that is limited by contributions (and “growth”) to what YOU put in there! When it runs out, payments will stop and what will you do then if that was your only source? Remember also that you are only allowed a maximum contribution (under federal law) of $16,500 per year — and most in the CNMI CANNOT even come close to this.
Here’s an actual example (my own): I was afforded the opportunity by my employer, the Federal government, in 1989 to supplement my CSRS retirement through its “new” voluntary DCP, the “thrift savings plan” or TSP. My contribution was maxed at 5 percent of gross pay and the government threw in an additional 1 percent. Unfortunately, I had only 8 years in which to contribute before I retired and only 12 years for it to “grow” before I could start taking a monthly sum at age 59 and ½. However, with a bi-weekly (maximum allowed) contribution of $125 over that 8 year period and careful management, my account grew to $67,000 (from $26,000 in contributions) by 2001. I began a modest monthly withdrawal of $1000. The “account” ran dry in August of 2008. Think I wasn’t prudent? Well, the TSP allowed members to allocate monies to a large number of investment vehicles at no charge and to change the vehicles at will — daily if you wanted to. Although I didn’t change stuff around that frequently, I did so many times and between 1997 and 2007, my portfolio grew (WITHOUT additional contributions) by an average of 18.5 percent per year — and that’s good in anybody’s book! NOW, do you see why a “pot” of $750,000 to $1,000,000 is needed? Fortunately, I have “additional” sources of retirement income — do you, will you?
So what should retirees, both current and future be doing — right now? Well, for one thing, you need to stop all the quibbling over the DBP – some are now even calling it a “battleground” and touting it as your “struggle.” Yes, you need to control its demise for the benefit of the most possible persons, but this is not and should not be your ONLY “battleground.” Manage it as best you can but…it’s a done, and DEAD, deal! That’s just exactly as the CNMI government wanted it to be in spite of NOT being able to surmise the absolute discombobulated chaos that is currently manifesting on the stage of human suffering like a Shakespearian tragedy — say Amen, (please) — the fat lady has sung!
Now, you need to be asking a LOT of questions about the DCP. As far as I can tell, it ain’t doing too good either. For instance, it APPEARS to offer a limited number of pre-chosen investment vehicles such as: 1) Aggressive profile; 2) Moderately aggressive profile; 3) Moderate profile; 4) Moderately conservative profile, and 5) Conservative profile. ALL of these are invested in portfolios made up of various types of investment combinations chosen FOR you. The company offers investment in these according to when you expect to retire (how many more years you expect to work). Remember, the closer you are to retirement, the LESS aggressive you want to be with your portfolio. So how have these profiles fared since 2007? Welllll….:
If you had invested in an “aggressive” profile in 2007 (expecting to work at least another 25 years or so), for every $1,000 in contributions, you would be DOWN 20 percent (by Oct. 2010 — the latest complete year for which ASC Trust figures are available)
If you had invested in a “moderately aggressive” profile in 2007 (expecting to work at least another 15 years or so), for every $1,000 in contributions, you would be DOWN 14 percent (by Oct. 2010).
If you had invested in a “moderate” profile in 2007 (expecting to work at least another 10 years or so), for every $1,000 in contributions, you would be DOWN 7 percent (by Oct. 2010).
If you had invested in a “moderately conservative” profile in 2007 (expecting to work at least another 10 years or so), for every $1,000 in contributions, you would be DOWN 2 percent (by Oct. 2010). And finally.
If you had invested in a “conservative” profile in 2007 (expecting to work only another 5 years or so), for every $1,000 in contributions, you would be UP nearly 10 percent over the three year period (by Oct. 2010).
Actually, ASC Trust is doing well to “grow” your portfolio by 3 percent a year in this “market” over the last three disastrous years – IF you were in the “conservative” pool. The question is, “How many current or retired employees actually KNOW what ‘pool’ they’re in?” There are more (questions that is): How many know what is in their account? How many can, or do, access the account DAILY? How many can, or do, move their investments from vehicle to vehicle prudently or even know how? What is the “cost” deducted from each account for management? How much are YOU contributing? How much is the CNMI government contributing? (CNMI government contribution is SUPPOSED to be a measly 4 CENTS per dollar of earned salary — are they?)
And the most important question of all: How much will I need when I retire? Do YOU know how to calculate it? CAN you determine what TODAYs dollars will be worth when you retire? WHEN will I be able to retire? Remember the example — $27k today is $58k in 25 years! Here is a great calculator for you to experiment with: http://cgi.money.cnn.com/tools/retirementplanner/retirementplanner.jsp
THAT is what the government and retiree associations should now concentrate on: ASK the questions, FIND the answers, PUBLISH the information and HELP employees and retirees establish more productive retirement portfolios.
This I repeat from part 4 of my series published on June 2, 2006: “I truly hope that many of you will not remain apathetic to this issue and shall raise your voices to let your representative in congress know what you want. I’m sure that many of you also have some very good ideas about how to make this system better. Our legislators NEED to hear them. After all, YOU are the boss and this WILL affect you and your children — forever.
Don’t be afraid to speak up — and, legislators, don’t be afraid to listen and make changes when the majority speaks — after all, good legislation is a true compilation of the voice of the people tempered with a rational and orderly system of control that ultimately serves to benefit the well-being of “we the people” — we are not your enemy and the majority of us put you there to represent all of the people’s collective views and needs — not solely those of some other elected or appointed official.”
Well, we all know that last paragraph (from 2006) was given short shrift for just about every decision since then — but what about today? WILL the majority of you stand up? Will you insist on being heard? Will you KICK OUT the incompetents? Will you seek rational, professional advice AND FOLLOW IT? Take control, now, for the future is yours.
Finally; The CNMI government had a chance in that fated summer of ’06 to restructure and “fix” the DBP as well as incorporate a supplemental and voluntary DCP. (Show of hands, please): How many of you STILL believe the CNMI’s “leaders” have acted in the best interest of its citizens? Or was it just nothing more than “the easy way out”?
DR. THOMAS D. ARKLE JR.
Winter Haven, Florida
