Defined contribution plan proposed

If enacted into law as proposed by the Fitial administration, all new public employees and eligible existing government employees would have their own “portable individual retirement accounts” on or after Jan. 1, 2007.

In a bill submitted to the Legislature Friday, the administration aims to create a Northern Mariana Islands Public Employees’ Defined Contribution Retirement Plan, making it the single retirement program offered by the government to its employees.

The bill defines defined contribution plan “as a plan in which savings are accumulated in an individual retirement account for the exclusive benefit of the member or beneficiaries.”

The existing retirement program is called Defined Benefit Plan.

This program defines the members’ benefits throughout life and gives the Fund the responsibility to manage the funds.

The Fund earlier said that under the Defined Contribution plan, members have an option to directly manage their own contributions.

Fund Investment director Mark Aguon has said that unlike the Defined Benefit Plan, which creates unfunded liability, defined contribution has zero unfunded liability “because you only match what the members contribute.”

Options

The administration bill provides that the Fund administrator shall provide a range of investment options and permit a participant to exercise control over his or her assets.

If the participant chooses to have control over the investments, the participant is not considered a fiduciary for any reason on the basis of exercising that control.

Direct investment of funds shall be in accordance with rules set by the Fund administrator.

Members

Existing Fund members whose employment continues on or after the effective date of the Act shall be allowed to continue with defined benefit plan unless they meet the conditions for transfer to the new program.

The proposal lists the following persons as “ineligible” for membership: Persons whose services are compensated on a fee basis; independent contractors; persons whose employment is for a specific project; and persons whose employment is purely temporary, seasonal, or part-time.

Existing members with less than 10 years of contributing service can become members of the defined contribution plan through a voluntary written election.

The proposal lists certain restrictions to those with more than 10 years of contributing service.

Contribution

The proposal requires that an employer shall contribute 4 percent of the member’s compensation.

Likewise, it requires the employer to make annual contribution to a fund for purchase of insurance and cost of providing occupational disability and occupational death benefits.

Members, meantime, shall contribute 10 percent of their compensation to their own account.

The employer shall deduct the contribution from the member’s compensation at the end of each pay period, and shall be credited by the plan to member’s account.

Right now, the Fund has some 8,000 members, including 2,000 retirees.

At present, the Fund requires the government to pay 36.7 percent in employer contribution.

Class I members pay 6.5 percent while Class II pays 9 percent of their compensation.

Due to the current fiscal crisis, the government could only remit 24 percent contribution.

The Fitial administration currently proposes to suspend this payment during the remainder of fiscal year 2006 to save up funds.

The government has $85 million arrears in employer contribution.

Total unfunded liabilities with the Fund reach nearly half a billion dollars as of Oct. 1, 2004.

The Fund, meantime, records some $500 million in total assets.