401 (k) Separate Accounts… A worst case scenario

During the past few days the financial markets have taken a major hit… $4 trillion and still counting.  So you open your insurance company website to see what changes have occurred in your 401(k) plan.  Hopefully, your losses are minimal.  The worst case scenario, if you have investments in Principal Life Insurance Company separate accounts, can be that Principal has frozen your account.

What is a Withdrawal Limitation?

In Principal’s own words, they describe below what they want you to believe defines the so-called “Withdrawal Limitation”…separate accountsThe most important part of this narrative is highlighted…. “It does not, of course, help with the effects of changes in commercial real estate markets.”  Principal is describing your value in the portfolio, since Principal decides what represents the “fair value” a/k/a “YOUR value”…. of the separate account.  In other words, they keep the retained earnings, even though you provided the money to purchase the investment!  Welcome to the world of insurance company separate account management.

While you will sacrifice to “protect” the portfolio of real properties from “deteriorating” in value, your 401(k) will pay the losses to the “commercial real estate markets.”  Frankly, I fail to see how the “portfolio” value of real properties would NOT be tied directly to the “changes” in commercial real estate markets… but in a Ponzi Scheme, I guess anything that you, the investor, believes about the account will work!  As far as the “contractual provision” is concerned, a similar contractual provision is attached to every separate account Principal offers their stakeholders, so if you don’t want to be another victim of Principal’s scam, you should have a conversation with your employer sooner rather than later.  The next “market correction” could freeze your retirement plan just when you need it the most.

Principal has added these withdrawal limitation disclosures to your group annuity wrapped separate accounts.  They can, and will, attach a withdrawal limitation on your separate account if they decide it will be in “your best interest” to do so.  Unfortunately, their logic is skewed, and should be a warning.  If your account(s) are already frozen, it is too late. Principal is NOT protecting YOUR investmentthey are protecting their own realized gains and retained earnings on YOUR money.  Your losses will be redefined as “unrealized losses,”   Remember, Principal owns your money, and they own the profits, so the investments have already been sold on the open market to mitigate their losses and protect their shareholders.  Under State of Iowa regulations, you are considered a “class 2” investor…. and gets paid last.  Below is the disclosure in your group annuity that gives Principal ownership of your plan assets…separate accounts  In doing so, the so-called units of value your own no longer have any backing… Principal has sold the equities, but the units remain in the account.  You will not get your money until contributions will cover the requests for withdraws.  In case you haven’t already figured this out, this is exactly how a Ponzi Scheme works!  Unfortunately, you will quickly learn that, at least on paper, YOU own the unrealized LOSSES through a diminished “fair value,” as determined by Principal management!  The process is complicated, but as long as the regulations allow insurance companies to actually own the money you deposit into insurance company accounts, this type of risk becomes reality.

If this does take place, you will soon receive a letter in the mail from an Associate Compliance Analyst with Principal stating that under ERISA rules, Principal can impose a withdrawal limitation, and change your plan in order  to “protect” all investors.  The letter may include a phrase like …. “the definition of retirement under the plan is not controlling under the exceptions to the withdrawal restrictions.”  and… “the definition imposed by Principal Life….adheres to our responsibilities under ERISA.”  Another letter may say that they will only pay “certain retirement benefits….. at or after the normal retirement age under the plan for those who have separated from service.”separate accounts  You have now discovered that not only did your entire retirement savings become inaccessible to you, even though you are fully vested in your plan and have reached the age of retirement, but in order to get what little is left, you and your wife will have to resign from your jobs in writing, and your employer of 16 years will not hire you back after you quit. 

The Department of Labor and other governmental agencies that espouse to be our protectors, in reality are allowing these indiscretions to happen.  Your losses will not be due to any economic collapse.  Greedy institutional investors were indulged in buying and over leveraging over priced properties before the 2008 collapse, and once again, they have been repeating the cycle with your earnings.  When the banks quit selling credit and the properties are worth less than their mortgages and mezzanine loans, insurance companies and investment companies will once again attack the non-guaranteed accounts like your 401k, stealing the equity to mitigate their own losses and to protect their stock-holders.

 

 

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Author: Dennis Myhre

Mr. Myhre can be contacted at..... dmyhre@fiduciaryfactor.com