Pension plans and investment sophistication

The government’s proposed “defined contribution plan” as a replacement for the present retirement plan for those government employees not yet retired has certainly stimulated a lot of discussion—both pro and con. That’s a good thing, the discussion, that is.

In terms of managing one’s own investment portfolio I maintain that many Americans, regardless of where they live, lack the financial sophistication and investment acumen to successfully manage their individual investments. Certainly some can—but I suspect many cannot for a variety of reasons, one being they just don’t want to be bothered with keeping up with the intricacies of the market and the many investment decisions that must be made.

How many of your retired relatives would be able to make wise investment decisions in the stock market and elsewhere? How many watch it on a daily basis? Could you trust all the “so-called” investment experts that come out of the woodwork to offer you assistance in making investment decisions?

Indeed, how many investors (me included) don’t simply leave investment decisions (at least to some extent) up to professional, full-time brokers and investment advisers, just as the CNMI’s Fund administrators do. Of course, there is the Fund’s administrative overhead—but consider that the Fund does make investment decisions for the benefit of the community (something an outside investor in all probability would not do). Witness the Judicial building and residential housing loans, all of which are best monitored by “on-island” administrators.

In any event, those government employees currently paying into the Fund through payroll deductions who care to do so can still take their rebate and other discretionary income that’s available and invest in a stock of their choice or some other investment instrument. I certainly wouldn’t presume to apply a “broad brush” opinion as to the sophistication—or lack thereof, of retirees and others; however, one can’t deny that a lot of folks in the islands borrow money from local banks and the CDA and fail to pay it back with the result they lose any collateral they pledged as security. That’s not too sophisticated in my book.

However, be that as it may, unlike the appointed members of the Board of Trustees for the Retirement Fund or “elected” officials, all others offering advice on the future disposition of member’s money have no fiduciary accountability under the law—and that applies equally to yours truly—but for me it is an interesting economic issue I can’t resist. As some of the old folks say, “talk is cheap—but money buys land.”

The central government’s track record in managing it’s own operational budget leaves much to be desired, e.g., the shopping mall purchase fiasco (a government investment), unpaid fuel bills (including the employer’s contribution to the Fund), the inability to deliver adequate power and water and on and on. All these leave many people with little confidence in the bureaucracy regardless of who is in office. I am of the opinion that a lot of people are not quite ready to accept the government’s untested theories and unproven advice concerning the disposition of their money—particularly when the government has failed in meeting its own financial obligations. Oh, I know some will say, “It’s a new day—a new administration.” Thankfully so, but let’s just wait and see what unfolds with other pressing issues that do not so directly effect the retiree’s nest egg.

As for the proposed pension plan known as the “defined contribution plan” as a replacement for the existing plan for future retirees, such a plan is in reality a “qualified retirement plan” in which the contribution is defined, but the ultimate benefit to be paid is not. Quoting from a web site under the subject of defined contribution plans:

“In such plans, each participant has an individual account. The benefit at retirement depends on the amounts contributed and on the investment performance of that account through the years. In such plans, the investment risk may rest solely with the employee because of the opportunity to choose from a number of investment options.”

“At retirement, defined contribution plan benefits are typically paid in installments or as a lump sum; however, they may also be paid as an annuity. Income tax ramifications and rollover options are the same as those for defined benefit plans. Installment payments for a period of less than 10 years are eligible for transfer to an IRA, while those lasting for a period of 10 years or more are not.”

I would imagine that most people would contribute their savings for periods greater than 10 years—many over a span of 15, 20 or 25 years in an investment plan.

This is where investment sophistication comes into play.

Bear in mind that, if investing is so easy, why do so many people lose in the stock market? Here are a few reasons:

Check out—http://www.sec.gov/answers/day trading.htm.

Day traders rapidly buy and sell stocks throughout the day in the hope that their stocks will continue climbing or falling in value for the seconds to minutes they own the stock, allowing them to lock in quick profits. Day trading is extremely risky and can result in substantial financial losses in a very short period of time.

Then there are the outright frauds that once posed as legitimate investment opportunities for many unsuspecting and trusting investors. Two of the more famous follow:

Robert Vesco was involved in something called “Investors Overseas Services.” He took over the IOS and he arranged a loan when mismanagement and a slump in the New York Stock Exchange put it in peril. With this loan he secured control of the company. He made himself chairman. Through a variety of machinations, he spirited away $224 million dollars from IOS and put the money into shell corporations. (Does this sound a little that the current Enron issue?) For awhile Vesco traveled in good company. He gave money to the Committee to Re-elect the President in 1972. The money was to bring pressure on the Nixon Administration to ease up on the SEC investigation. During a special grand jury investigation he was charged with conspiracy, obstruction and perjury. One thing led to another and he was sentenced to 13 years in prison.

Then there was Robert Dale Johnson. He put together a $76 million Ponzi scheme by telling investors he would use their money to corner the market for wine used in salad dressing. He told investors he would give them huge returns. While the company didn’t even exist, he paid one investor with another’s money. His scam continued until he was exposed, but not before investors had lost millions. Talk about investment sophistication—he took bankers, lawyers, doctors and investment brokers to the cleaners for everything they had. The Feds eventually caught up with him and sent him to prison. He was incarcerated with the Watergate bunch, Stuart McGruder, Charles Colson and other criminals. He was the nicest guy, the smoothest operator you would ever meet. A most convincing “operator.” I knew him personally but he didn’t take advantage of me.

In closing, I think Dr. Tom Arkle’s astute solution to the Fund’s problems is the best that has come forth. Check it out in the May 17th issue of the Saipan Tribune.

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William H. Stewart is a forensic economist, historian, and military cartographer.