Managing your own nest egg

In the midst of the CNMI Retirement Fund reform debate, some individuals are now publicly arguing that government workers are not savvy enough to take more personal and direct control over their retirement assets. In other words, they argue that government workers are not smart enough or sophisticated enough to handle their own money and therefore must continue to rely on the government to make retirement investment decisions for them.

These men and women apparently have very little faith in the individual investor’s ability to handle his own retirement assets with the help of financial professionals, yet apparently have great faith in the ability of government political appointees, such as the Retirement Fund board and the Retirement Fund director, to hand over our money to high commission, full load money managers or expensive full service brokers charging high fees.

It seems obvious to me that the individual investor would greatly benefit from a defined contribution plan that removes the expensive political overhead and middlemen. Through no load and low expense mutual funds, individual investors can make many of the same investments made by the NMI Retirement Fund at much lower cost and much more profitably.

These individual investment decisions need not be terribly complicated or risky. They can be very inexpensive, simple and easy. For example, an individual investor could simply purchase a series of low cost, no load index funds or exchange traded funds. Index funds have been known to beat most actively managed portfolios over the long run.

It would be interesting to compare, for example, the historical return of the S&P 500 Index (or the Wilshire 5000 total stock market index, for that matter) to the NMIRF portfolio since the inception of our government Retirement Fund. Does the NMIRF come out ahead after expenses and management fees have been fully deducted?

(Please read A Random Walk Down Wall Street by Burton G. Malkiel and Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor by John C. Bogle, the founder of the Vanguard Group.)

In the information age, with the assistance of the Internet and with the many financial television programs and publications available (CNBC, Suze Orman, Smart Money, Kiplinger’s, etc.), it is relatively easy for the average government worker to educate himself on financial fundamentals and begin to take control over one’s financial life and long-term retirement program.

Moreover, because everyone has different financial needs and priorities, it makes far more sense for an individual to direct his or her own retirement portfolio according to his or her life stage, lifestyle, or risk tolerance. For example, younger government workers can afford to take more risks and get more equity exposure, while older workers probably need to focus more on bonds and income.

Unfortunately, our current government retirement system makes no such distinctions. Everyone’s retirement contributions are managed in one large pool of investments geared for everyone, despite their different needs, preferences, and risk tolerances. Under this situation, if the NMIRF gets it wrong and goes down, everyone suffers under the same overall investment portfolio.

Under individually tailored defined contribution plans, however, everyone is in a different, individually tailored boat. So, if one boat sinks, we don’t all sink with one set of centralized portfolio decisions that fail to take our unique needs and preferences into account.

Ultimately, if we want to be successful, we need to take more direct control over our financial lives. We need to take individual responsibility for our financial affairs. We cannot afford to continue to rely on our government’s history of financial mismanagement. The proposed defined contribution plan empowers us with the golden opportunity to take more control over our retirement contributions, without forcing taxpayers to bail out our bankrupt and unsustainable pension program for future retirees.

Regardless of what transpires with the CNMI Retirement Fund, CNMI government workers should be sure to max out ($4,000) their 2006 Roth IRA before April 15, 2007. To be safe and secure, we must save and invest outside of the NMI Retirement Fund.

Charles P. Reyes Jr.
Capitol Hill