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Puerto Rico government launches defined contribution program for 110,000 employees

By on December 11, 2019

Public workers to choose retirement savings investment options under new plan

SAN JUAN – The government of Puerto Rico announced Tuesday the launching this month of a new defined contribution savings plan for 110,000 public employees, who will be allowed to determine how their pretax contributions will be invested for their retirement.

The new retirement plan, similar to a 401(k) program, will include government employees covered by Act 106 of 2017, the Act to Guarantee Payments to Our Pensioners and Establish a New Defined Benefit Plan for Public Servants.

Starting Dec. 19, these employees will be able to decide how a combined $584 million, in accumulated interest-bearing funds that have been withheld from their wages for retirement since July 1, 2017, is invested.

“For the first time, public employees will be the ones deciding how they wish to invest their money. This will make for a sustainable, transparent, reliable and viable system. There are no more patch ups here, but a true and definitive solution that will empower employees and achieve a true transformation of the [commonwealth] Retirement System,” Puerto Rico Retirement Board (PRRB) Executive Director Luis M. Collazo said during a roundtable with journalists at the Fiscal Agency and Financial Advisory Authority’s (Aafaf by its Spanish acronym) offices at the Minillas Government Center in Santurce, where he was accompanied by Aafaf Executive Director Omar J. Marrero.

Collazo said that employee contributions and matching agency contributions in the similar 2000 Commonwealth Retirement System Program were set aside to be invested by the government on behalf of participants.

In turn, public employees in the new retirement savings plan will be able to choose investment options from a roster of 11 funds that were selected by a special PRRB committee, the PRRB chief said. Participants will be able to invest in fixed maturity combined funds and basic funds, including stocks, bonds and short-term instruments such as certificates of deposit and money market funds, he said. Employers will not make matching contributions in the new plan.

“The board approved this selection of funds so as not to confuse [participants],” he said, adding that these public employees will have access to a website (https://plan106info.com) and mobile app in which they will be able to follow the performance of their investments.

Lincolnshire, Ill.-based Alight Solutions Caribe Inc.—the retirement contribution processing firm hired by PRRB in February to manage the new retirement plan accounts—has set up a Financial Education Center, accompanying website and a toll-free number (1-844-752-6106) to help employees manage their investments. The company, which has run call centers in Puerto Rico since 1995, processes $2 billion a month in defined contribution payments for more than 80 employers.

“[Alight] will only provide orientation on investment terminology and not financial advice, so that these employees may make their own decisions,” said Collazo, who noted that on Monday he met with retirement issues coordinators representing some 88 government agencies, public corporations and municipalities to discuss the new plan. He said these coordinators will be “contact points” to address doubts and issues brought up by their respective agency’s employees.

“With the Financial Education Center, each agency coordinator will use computers to train employees to create [investment] models with real numbers,” he said.

Participants in the new plan will include employees from the central government, municipalities and public corporations. Public school teachers who have been working since August 2014 will also be able to participate in the plan, while judicial branch employees have the option of participating as well.

Participants are required to contribute a minimum of 8.5 percent of their salary to the plan, but may contribute up to 20 percent of their pay, or a maximum of $15,000 a year for employees age 49 or younger, and up to $16,500 for employees age 50 and older.

The plan has no age or work tenure requirement for withdrawals, said Collazo, noting that employees who leave their jobs can take out the accrued funds.

The retirement plan will be launched in two phases, the PRRB chief said, noting that notifications with the information needed to register in the new platform and access plan accounts will be mailed in the next few days. Participants in the first phase will be able to access their online account, choose investment funds and designate beneficiaries, among other transactions. The new site will feature tools and educational materials that will help employees get acquainted with the plan and acquire the knowledge needed to invest in accordance with their interests and needs, he said.

During the second phase, public employees will be able to see their accrued balances online and have the option to increase their contribution rates.

Initial plan fees will be assumed by the government, while employees will pay investment management fees that could average about 1 percent, Collazo said. The plan will eventually include a loan program that will allow participants to borrow up to 30 percent of contributions, up to $10,000. However, in the new program, employees will be required to pay off old loans before taking out new ones, and will not be allowed to refinance such loans, he said.

“This will be done later on because it will require changes for different employers and credit union and bank accounts,” he said.

Banco Popular de Puerto Rico (Popular Inc.) will be the new plan’s permanent trust fund and payer, while Bank of New York Mellon was selected to be its custodian bank.

Marrero, who serves as the government’s chief financial officer, said the more than $500 million in accumulated retirement payroll deductions are currently deposited in a Banco Popular trust account where they are being invested in Treasury bills.

He said that under the 2000 Commonwealth Retirement Plan, the government used plan contributions to pay existing pensions in the old system instead of being invested. In the Plan of Adjustment submitted by the Financial Oversight & Management Board in October for federal court approval in the commonwealth’s debt restructuring process, the government will be required to return $1.3 billion in wrongly allocated retirement funds to this plan.

“The government is empowering current employees to participate in their retirement planning,” he said, noting that the technological investment platforms aim to allow employees to take control of their own future. “The government is fulfilling its historic commitment that these funds be duly segregated.”

Plan participants will be allowed to invest in the following market funds:

  1. Vanguard Institutional Index Fund Institutional Shares (US stocks)
  2. Wells Fargo Growth Fund Institutional Class (US stocks)
  3. Diamond Hill Large Cap Fund Class Y (US stocks)
  4. Vanguard Small-Cap Index Fund Institutional Shares (US stocks)
  5. ClearBridge Small Cap Fund Class I (US stocks)
  6. Vanguard Total International Stock Index Fund Institutional Shares (International stocks)
  7. JOHCM International Select Fund Class I Shares (International stocks)
  8. Thornburg Strategic Income Fund Class R5 (Bonds)
  9. Baird Aggregate Bond Fund Class Institutional (Bonds)
  10. T. Rowe Price Target Retirement Date
  11. BPAS PR Capital Preservation Fund (Default option)

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