Fund in a fix; Retirement fund contract finally up for grabs

“I’ve told people with 19 years to go home and think about it. What they are about to do is irrevocable.”

Paula M. Blas acting director of the Government of Guam Retirement Fund has watched hundreds of government of Guam employees transfer their vested retirement savings into what is called the Defined Contribution Plan so they can get at their money by claiming hardships.

“The creation of the D.C. Plan was to the government’s demise ” Blas said. “We’re setting ourselves up to become one big welfare state.” She said a huge percentage of the thousands of participants in the plan have little to retire on. “There’s only a small percentage that understands you need to save for retirement and leave it alone.” Blas said Guam is headed for a social crisis as more GovGuam employees retire with less money.

“Some people even if you look at them and say ‘Don’t do it’ — if they are backed into a corner financially — you can’t reason with them ” Blas said in an exclusive interview with the Journal.

She said more than 304 participants in the Defined Contribution Plan cleaned out the available portions of retirement-plan accounts in 2004 by claiming hardships — mostly for medical emergencies or to prevent foreclosures. They are allowed to take hardship distributions once a year. Blas said the hardship distributions spiked last year up from 230 in 2003.

The beleaguered Government of Guam Retirement Fund and its shortcomings will be the focus of the financial community in about 30 days when the fund’s board of directors for the second time in 10 years announces a request for proposals to manage the affairs of the Defined Contribution Plan and the “457 Plan.” The RFP was undergoing final revisions in early August and will be sent to Carlsmith Ball LLP for review. Blas said it then will go back to the board for its “blessing.” She noted that the RFP most likely will request for bundled and unbundled bids for the two plans and separate bids for ancillary services mostly keeping track of death and disability insurance for retirees. The retirement fund plans to run an RFP ad in Pensions & Investments online magazine in September.

Vince C. Camacho regional vice president for Great West Retirement Services which has administered the plan since it was created in 1995 said “We don’t mind that it’s going out to RFP. Great West Retirement Services is one of the top providers in the nation for services in regards to defined-contribution and 457 deferred-compensation plans. We don’t know what the new requirements will be in the RFP but we will be in contention to retain the contract.”

Other financial-management companies have been anxiously awaiting a new RFP announcement since a failed attempt to bid out the lucrative contract ended in dispute in January 2005. This retirement fund’s RFP announcement on April 19 2004 attracted six bidders but Great West protested that the process allowed altered bids prior to the award of the contract and the RFP was withdrawn after the attorney general concurred that the process was faulty.

What’s at stake are fees that last year amounted to about $876 000 for Great West to administer Defined Contribution Plan accounts for 5 418 GovGuam employees and 564 accounts in a parallel 457 Plan named after the section of the Internal Revenue Code in reference to deferred-compensation plans. Great West is paid $54.08 per participant per year in addition to administrative expenses that are billed directly by Great West. Great West collects another $20 per employee per year to reimburse the fund for initial monies loaned to operate the plan. The fees were set by the fund board and included in legislation that established the fund.

Administrative Services Corp. one of last year’s bidders has claimed for years that GovGuam should “get its vendor to achieve higher success targets or find a new vendor.” (See “A retirement fund in crisis” in the December 2001 issue of Guam Business.). Clearly the 5% of employees’ wages going into the D.C. Plan which is matched by the government is insufficient to build nest eggs. ASC claims the D.C. Plan can be a success if participants begin taking enough risk to receive at least an 8% return and participants need to receive enough education to be comfortable to allocate funds correctly or invest more of their pay using the 457 Plan.

Blas said there has been pressure to issue a new RFP particularly from ASC which has “hounded” the retirement fund. “It’s their approach. It got personal.” She said it is not unusual for public funds to maintain long-term relationships with management companies.

David J. John president of ASC said: "The Government of Guam Defined Contribution Plan is the entire safety net for those employees hired by the government over the last 10 years. With this this contract is very important and should be followed carefully by everyone in our community. We welcome MBJ’s interest. However as ASC plans on bidding on the RFP once it is issued we do not believe we should make any comments toward the current provider’s progress or lack of progress on this contract at this point in time."

GovGuam on Oct. 1 1995 closed the door on the superior Defined Benefit Plan because the retirement fund was headed for financial disaster no longer able to keep up with its growing annuity payments for retirees. GovGuam employees who enrolled after that date became members of the Defined Contribution Plan. In addition each year the retirement fund sends letters to targeted D.B. members instructing them on how to transfer to the D.C. Plan. “The lawmakers intent was to transfer D.B. members with less than 10 years and a projected age of 35 years and below. They are actually sent letters telling them about D.B.-D.C. transfers. It happens each year. It’s meant to take the pressure off the heavily unfunded liability of the Government of Guam Retirement Fund ” Blas said.

The enrollment scale was 50-50 in 2004 and tipped in favor of the D.C. plan for the first time in 2005. At the end of June there were 5 418 active D.C. participants compared to 4 576 in the Defined Benefit Plan. The assets of the Defined Benefit Plan at the end of June amounted to $1.24 billion while the Defined Contribution Plan’s assets weighed in at $114.04 million. The 457 Plan had $5.4 million stashed away.

“Now who in their infinite wisdom said 5% of their salaries was enough?” Blas said. “Why not keep it at 9.5%?” GovGuam employees in the Defined Benefit Plan contribute 9.5% of their salaries and the government contributes an additional 20.81% of the amount of their salaries. It contributes 20.81% for each of the Defined Contribution participants but only 5% goes to their accounts; the remainder going to prop up the D.B. side.

Blas said extensive education of GovGuam employees needs to take place fast. Since 2001 when the D.C. Plan first saw a member retire 122 have left unprepared in her opinion. “The majority take a lump sum when they go. Only two or three have taken annuities. It would be interesting to see how many of those 122 have returned to find jobs because they can’t afford to retire.

“It’s not a bad plan ” Blas said. “They should have just prepared the government of Guam employees better. At the rate we’re going now we’re talking about more welfare and food stamps. It you want to take a paternalistic approach perhaps we should close the door on hardship distributions.”

Camacho said Great West conducts monthly classes for GovGuam employees which takes them through the entire financial-planning process. “During this process we find out what their discretionary income is and often we find they are trying to manage debt. It’s a sign of the times ” Camacho said.

Blas said Great Western’s performance is reviewed annually and reviews have been good over the years. MBJ

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