Blind Justice or a Captured Agency?

Blind Justice or a Captured Agency?

Dr. Paul Johnson, Associate Professor with the Department of Political Science at Auburn University in Auburn, Alabama, defines Captured Agency as:

“A government agency, especially a regulatory agency, that is largely under the influence of the economic interest group(s) most directly and massively affected by its decisions and policies — typically business firms (and sometimesjustice professional associations, labor unions, or other special interest groups) from the industry or economic sector being regulated. A captured agency shapes its regulations and policies primarily to benefit these favored client groups at the expense of less organized and often less influential groups (such as consumers) rather than designs them in accordance with some broader or more inclusive conception of the public interest.”

In 2013, the American Chemical & Equipment, Inc. Retirement Plan (ACE) filed a $300 million lawsuit against Principal Management Corporation, Etal, alleging excessive fees.  As defendants, American Chemical named 22 affiliates of Principal Financial.  The lawsuit was moved to The Southern District Court of Iowa in a Memorandum Opinion by the U.S. District Court, Northern District of Alabama.  ACE had alleged the defendants, as advisers to the principal funds, first “pocket the entire acquired fund fee from the principal funds as investment money” before distributing a portion of the fee to sub-advisers for managing the underlying funds.

 American Chemicals & Equipment attorney was pleased to receive Judge Jarveys opinion, stating it  “was well-reasoned and concise in resolving important issues in our case.  Further, we think the opinion frames in a very helpful way the issues that will be at the core of the trial of this case, and American Chemical is looking forward to trying this case before Judge Jarvey.”    Two years later, the honeymoon ended when Judge Jarvey found that the lawsuit, brought by the retirement plan of American Chemicals & Equipment Inc., could not proceed because the plan didn’t hold “shares” in mutual funds that actually charged the offending fees.  That, according to Judge Jarvey, is because the plan sued over a “fund of funds,” a product called LifeTime Funds, an investment account managed by the defendant.  The complaint claims Principal Management got $80 million in fees in 2012, $102 million in 2013 and $118 million in 2014 “and did virtually nothing” to earn the massive paydays.

According to the judge, the plan is not a shareholder in the funds that underlie LifeTime Funds and thus cannot proceed under the Investment Company Act of 1940, which holds that a plaintiff must be a security holder in the underlying funds to sue over fees.  The Iowa federal judge ruled against the plaintiff and the $300 million in excessive fees, awarding summary judgment to Principal and it’s affiliates.  (Above summaries were from www.law360.com.  This is case number 4:14-cv-00044, in the U.S. District Court for the Southern District of Iowa)
 
News in recent months have been on the successful efforts employers have experienced in suing to recover excessive fees charged by their plan providers.  As learned by the ACE, Inc. retirement plan,  Principal Financial Services is the exception, literally winning every case brought before the Southern District Court of Iowa.  One reason for Principal’s high success rate in the Iowa district court system could be the fact that previous Iowa Chief Justice James E. Gritzner was a classmate and is a friend of two of the top executives in Principal Financial Services.  Gritzner,  President and CEO Larry Zimpleman and Senior Vice-President Karen Shaff all graduated from Drake university in 1979.  Shaff and Gritzner hold law degrees from the Drake University Law School, and Gritzner has also contributed personal funds to an animal relief cause sponsored by Karen Shaff.  At the time this case was heard in Iowa, then Chief Justice Gritzner was Judge Jarvey’s boss, and Jarvey, as the current Chief Justice, is now Gritzner’s boss.  Based upon the above facts, one could assume that an “elitist” relationship may exist between Principal Financial and the Southern District Court of Iowa. 
 
Dr. Johnson defined the “elitist theory” as follows:

“The theoretical view held by many social scientists which holds that American politics is best understood through the generalization that nearly all political power is held by a relatively small and wealthy group of people sharing similar values and interests and mostly coming from relatively similar privileged backgrounds. Most of the top leaders in all or nearly all key sectors of society are seen as recruited from this same social group, and elite theorists emphasize the degree to which interlocking corporate and foundation directorates, old school ties and frequent social interaction tend to link together and facilitate coordination between the top leaders in business, government, civic organizations, educational and cultural establishments and the mass media. This “power elite” can effectively dictate the main goals (if not always the practical means and details) for all really important government policy making (as well as dominate the activities of the major mass media and educational/cultural organizations in society) by virtue of their control over the economic resources of the major business and financial organizations in the country. Their power is seen as based most fundamentally on their personal economic resources and especially on their positions within the top management of the big corporations, and does not really depend upon their ability to garner mass support through efforts to “represent” the interests of broader social groups. Elitist theoreticians differ somewhat among themselves on such questions as how open the power elite is to “new blood,” the exact degree of agreement or disagreement that usually prevails within its ranks, and the degree of genuine concern (or lack thereof) for the broader public welfare that enters into their choices of public policy goals, but all such theorists broadly share the notion that it is these few thousand “movers and shakers” who really run the country and determine the basic directions of public policy, certainly not the manipulated and powerless masses of ordinary voters choosing among candidates at election time.”

 ACE employees and their attorney fully expected to gain support from Judge Jarvey following his refusal to dismiss the suit alleging Principal Management Corp. and Principal Global Investors, llc pocketed excessive fees.  U.S. District Judge John A. Jarvey previously ruled that American Chemicals & Equipment Inc. 401(K) Retirement Plan had standing under the Investment Company Act to launch a suit alleging Principal Management and Principal Global retained a so-called acquired fund fee that was in breach of their fiduciary duties to investors in a group of mutual funds, with a combined $18 billion in assets.  As it turned out, ACE was not a “security holder” as defined in the ICE, since the principal funds, unlike the underlying funds which were securities, were not publicly traded, and the so-called 401k investors owned only”units” in said funds.
 
Principal claims to target the small to mid-sized employers who want to offer a 401k plan to their employees for a reason.  American Chemicals and Equipment is an exception to this policy. Principal is considered a “box” store for 401k plan sponsors, offering much needed services such as record-keeping and administration services as well.  You will not find a Fiduciary in either Principal Financial or their insurance advisors and brokers.  They also offer “fiduciary services,” which is included in the record-keeping and administration services, but they are NOT fiduciaries.  This fact is important, because as an employer and plan sponsor, you ARE a fiduciary for your employees.  When you agree to do business with Principal Life Insurance Company or any of 200 other insurance companies, you have invested your entire net worth on their honesty, their corporate and moral governance procedures.  It doesn’t matter if you use a broker that works for an insurance brokerage firm as your investment advisor…. unless he/she states in writing that they are a Fiduciary, you will be liable for their mistakes and abusive handling of your plan assets.
 
As an employer and Plan Sponsor, you can protect yourself and still provide a retirement plan for your employees?  Hire an investment brokerage firm that clearly states in their website they are fiduciaries.  The norm today is for most non-fiduciaries to publish facts on their web site that implies they have your best interest without actually using the term “fiduciary.”  They may “strive to build lifelong personal relationships,” or “believe in being good people”.  The term “fiduciary” is used in the context of providing fiduciary support services,

 

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Author: Dennis Myhre

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