More repercussions of the ‘Defined Contribution Plan’: Part 2

In this part, I would like to specifically address that part of S. B. 15-47 that pertains to the CNMI government’s proposal to contribute 4 percent of the employee’s salary rate as the government’s “matching” share.

Under the current plan, the government’s matching share is much higher and employee share is lower. That will be reversed under the “new” Act: S. B. 15-47. While there is nothing inherently wrong with such a reversal, S. B. 15-47 has been designed to allow the CNMI government to NEVER have to pay this “share” into your IRA.

This ultimately means that your IRA will grow much more slowly and, at the end, will contain much less savings—just when you will need it the most. The first such “worrisome” statement appears on Page 8, line 17: “The purpose of this chapter is to provide public employees with a defined contribution retirement plan that is fully funded ON A CURRENT BASIS from member and employer contributions. (Emphasis added) Just what does “current basis” mean? To me, it appears that this means whatever amount of money is already in there is what you’ll get—NOT to include any “past due” contributions from the government (remember that past due 124 million?). Perhaps someone can clear this up?

Now for the single biggest “weasel-worded” statement of the Act: (page 14, line 12) “A matching employer contribution MAY be made on behalf of that included employee to the new account IF the employer makes the matching contribution from funds appropriated by the legislature for that purpose.” Well, well, well! I have seen this in countless pieces of legislation over the years and in every single case the administering authority has taken those precious words (may, can, should, if, etc.) to heart and used them to circumvent the intended purpose of the legislation whenever and however it happened to suit their purpose. In this case, the government will NEVER have to come up with that 4 percent and the legislative and executive branches can simply sit back and point fingers at each other all century long without a single ounce of remorse and an open book of excuses. Why not use mandating words such as “shall” or “will” and thus clear up the appearance of conflict with page 16, line 2: “an employer SHALL contribute…”

Not only that, but this is reinforced in no less than two additional statements throughout the Act: Page 20, line 25: “If a member dies before benefits commence, the member’s beneficiary is immediately eligible to elect distribution of the MEMBER’S SHARE of the member’s individual account.” What about the government’s share? Is that portion now “forgiven” and, if it was ever made, will it revert back to the government from whence it came? And; page 21, line 10 (under the heading “Forms of Distribution”): “A participant may elect to receive the PARTICIPANT’S SHARE of the individual account in a…” Once again, what about the government’s 4 percent share? We giveth and we taketh away; is that right?

What about some of the other provisions that are “worrisome?” Such as Page 8, line 3: “Years of Service” “Permanent full time means an included employee who is occupying a permanent position that regularly requires working 30 or more hours a week…” Does this mean that if I work 40 hours a week and my fellow employee works only 30 hours a week, we will BOTH get years of service to our credit in the SAME amount even though my fellow employee puts in 25 percent LESS time than I did? Is that fair?

What about page 9, line 23: “(3) Cause PERIODIC reports or statements of account to be rendered to members of the plan;” Put this together with page 19, lines 6 through 16 that allows employees to “direct” or “change” account balances “not more than once daily”. How is the employee going to be able to “direct” or “change” anything if only “periodic reports” are required but no specifications are given? I realize that this act gives the administrator authority to do all these things—but what if he or she does NOT do all these things, especially if the Act contains no mandate or even a hint for this type of specific item to be done? In order for an employee to “direct” or “change” their account, information must not only be available DAILY, but up to date and complete with not more than a 24 hour “lag” time between employee order and effectuation of the order.

The only practical way to do this is the same as the Federal government does with its’ TSP (IRA) employee accounts: they are posted and accessible on the Internet and current to the day. What if there is no funding for an administrator to do this? This is going to be a relatively small plan; therefore, transfer fees could be prohibitive. Are employees then to be left unable to make needed changes when the fund(s) they happen to be in start to go down while the ones they are not in go up? Is this fair? Believe me, there could be some really rude surprises in store for some employees when they finally receive a “periodic” report only to find they made a poor choice back at the start and did not have sufficient information or the opportunity along the way to “adjust.”

As always, just about any fund can perform negatively or positively on a more or less cyclic period. An employee’s IRA could go down even in the so-called “safe” government bond market (if offered here); therefore, it is vital that employees be given information frequently regarding cyclic trends when they begin to manifest. There should not be any “fees” for doing this either—yet other parts of the act provides that an administrator may charge “fees” when necessary. This could eat up an active and prudent employee’s account as fast as it grows—if it grows.

Here’s a hint: Did you know that funds associated with stocks have operated on a precise 52 month cycle since the early ’70s? Well, that cycle will center around August to September of this year and pre-indicators are that it is on schedule. If you are in stock-associated funds, even small caps, now, watch closely and be ready to switch to safer bonds later this summer to avoid the 20 percent to 25 percent “correction”—then return on the rebound at the end of the year! Imagine your IRA LOSING 20 percent of its value every 52 months because you were unable to monitor it well enough to keep up. NO government fund administrator is going to do that for you!

Well, there are lots more. We’ll look at some of them in Part Three – next.

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