Is Your 401k a Shell Game?
The Shell Game, according to Wikipedia, is a gambling game, but when a wager for money is made, it is almost always a confidence trick used to perpetrate fraud. (Source: https://en.wikipedia.org/wiki/Shell_game ). The Free Dictionary calls it “a method of deceiving or cheating someone, by moving things from one place to another in order to hide what you are doing.” Some fraud investigators are recognizing what previously would have been called a Ponzi Scheme, is today called a Shell Game.
I prefer to describe a Shell Game as a Ponzi Scheme on steroids. The goals are the same, to extract money by fraudulent means, from unsuspecting investors. Bernie Madoff got caught not because our government exposed his dirty tricks… he got caught because an enterprising investigator took the time to pursue Madoff’s crimes… he persisted until someone finally listened. Had he not persisted, Bernie would still be ripping off investors today.
But a Shell Game has one distinct feature. Investors are given clues to the fraud through disclosures required by federal agencies. If the fraudster is successful, he will later simply freeze the account, devalue it to it’s true GAV over a period of a few months, then start the process over. Perhaps the most active shell game in the financial markets during the past decade has been the Principal Life U.S. Property Separate Account (PUSPSA). This group annuity investment has been in circulation since the 1980’s, it’s beginnings an innocuous commercial property fund, gaining reasonable account value each year. When Larry Zimpleman took over as president and chief operating officer of The Principal in 2006, everything changed.
For the PUSPSA, the first change was to convert all reportedly owned commercial property investments into shell companies, private LLC’s registered in Delaware and reported to the applicable state governments as foreign entities. Plan asset accounting was incorporated into Principal’s general fund, where off-balance sheet accounting and shadow banking became the normal method of hiding debt and other liabilities. All plan assets were owned by Principal Life Insurance Company, as stated in the group annuity contract, agreed upon by all plan sponsors that set up 401k plans through Principal Life. The image below is taken from a typical Principal Life group annuity contract…
By definition, A group annuity contract is issued by a life insurance company to a tax-qualified retirement plan. In group annuities, employees do not own shares of specific funds, but own “units” in the underlying pooled investment. (source: www.wikinvest.com/wiki/Group_annuity) the key element is the lack of ownership… defining what a “unit” is becomes virtually impossible. A unit for on class of 401k investors may be valued 10 times higher than another class. The following chart defines the various rate classes assigned to the Principal U.S. Property Separate Account as per the 2013 Annual report: Chances are, you have no clue as to YOUR rate class for your individual group annuity. All separate accounts sold through group annuities by Principal Life Insurance company have “rate classes,” and assigned to each rate class is a value. To understand exactly what the “unit value,” aka, share value of your investment is, you must know what your rate class is, then match that class with the following table which defines the value of each rate class unit… The information below details the per share operating performance for the 2013 and 2012 rate classes of the Account and is based on the terms, including fees charged, of the specific underlying group annuity contract, the participating plan, and the services provided:From the above charts, you can interpolate the “value” of your unit of investment by first locating your rate class, then find the Per Share Operating Performance for each share in your rate class. If your group annuity shows you have a Rate Class B, then your Net Asset Value is 1/20th of Rate Class A. While your Total Return may be slightly higher, the value of your unit is much less.
I will be the first to admit that I do not understand why Principal Life Insurance Company needs a rate class in a 401k investment product. If Employer A has a plan that includes the PUSPSA, and Employer B has the same investment, why would the rate structure be different… there are no risk issues, since the purpose of the Defined Contribution plan is for the investor to assume all risk. I have googled the hell out of rate class and find nothing. If the same dollar in Plan A is used to buy a unit of the investment, then why would Plan B be any different. So let’s go to Principal’s explanation:
FINANCIAL HIGHLIGHTS…”Participation in the Account is available through the purchase of certain group contracts and policies issued by Principal Life resulting in various rate classes. The information below details the per share operating performance for the 2013 and 2012 rate classes of the Account and is based on the terms, including fees charged, of the specific underlying group annuity contract, the participating plan, and the services provided.”
Ok, the above explanation clears it all up…. one plan gets 1/20 value per “unit or share” because of (1) terms, (2) fees charged, and (3) services provided. I am not sure why any of these reasons would require different rate classes. If you go to a auto dealer to buy a new car, the price is listed on the window. If I pay cash, I may save some money, but I drive off the lot with the exact same vehicle that the guy does who takes out a loan for his purchase. If I want to buy a share of Microsoft stock, I will have to pay the exact same amount as you, providing we complete the purchase at the exact same time. It is a share of stock. As a 401k investor, we are led to believe we are “buying” basically the same product from Principal Life Insurance Company as if we were buying a stock share through Fidelity… Fidelity does not have “rate classes” attached to your purchase.
We should be able to assume the price I pay for a unit or share of the PUSPSA is the same as the price you pay… after all, we are both purchasing a unit or share of the same product. By assigning rate classes to your purchase of the separate account investment, Principal can segregate your share value from my share value, and if you are a Rate Class A, you received 20 times more in value than I did as a Rate Class B, or vice versa, depending on which “shell game” Principal is playing with our money.
The Shell Game is an investigation nightmare…
The main problem for fraud investigators is to research and identify criminal activities in a typical Ponzi Scheme…. where there is a “shell game” involved, the task is even greater. Often it involves a conspiracy, including joint investors or other parties. The fraudster knows this fact, and often can operate for years without risk of prosecution. Warning signs do exist, and for the PUSPSA, it was when the account was frozen in September, 2008. Access to the account by investors was blocked by Principal, allegedly due to a liquidity problem, yet they were committing large amounts of PUSPSA cash liquidity for joint ventures with their investment partners. Principal had also committed the entire value of the PUSPSA for purchase agreements to pay off loan defaults by developers not related to the account…. this was a common practice for Principal in 2007 when bank loans were becoming more difficult to obtain without adequate collateral. For this reason, Principal agreed to Loan Purchase Agreements, primarily with Wachovia Bank, later to be purchased by Wells Fargo Bank. Bank of America located near Principal’s corporate headquarters in downtown Des Moines, Iowa, also accepted Loan Purchase Agreements for Principal for Developer loans, essentially guaranteed by the entire value of the PUSPSA. Below is an snapshot example of a loan purchase agreement for property located in Henderson, Nevada…
When I committed my retirement funds into the PUSPSA, I did not expect Principal to use my money to not only guarantee a loan for some unknown developer, but actually agree to purchase the loan if that developer defaulted. As it turned out, that “developer” was one individual in Phoenix, Arizona, that owned a small restaurant located in an abandoned gas station.
Principal, for the PUSPSA, purchased stressed office buildings at excessive prices, owned by developers that had defaulted on loan commitments to Principal. Effectively, Principal was paying off bad loans they made to developers with PUSPSA plan assets, showing unrealized losses on their balance sheets to devalue the account to a fraction of it’s original value. The evidence that Principal Life defrauded the Principal U.S. Property Separate Account is profound… I am convinced that when President-Elect Trump takes over in January, his administration will prosecute these crimes.
Sadly, the PUSPSA continues as an investment today where permitted by the Department of Labor. Principal has now expanded the right to freeze all separate accounts offered to their plan sponsors under the 401k group annuity umbrella as stated in the Endnote disclosures of this recent sales brochure…
“Principal Life Insurance Company reserves the right to defer payments or transfers from Principal Life Separate Accounts as described in the group annuity contracts providing access to the Separate Accounts or as required by applicable law. Such deferment will be based on factors that may include situations such as: unstable or disorderly financial markets; investment conditions which do not allow for orderly investment transactions; or investment, liquidity, and other risks inherent in real estate (such as those associated with general and local economic conditions). If you elect to allocate funds to a Separate Account, you may not be able to immediately withdraw them.”
The fraudulent use of investor’s money will continue in the insurance industry until our federal government recognizes this problem and prosecutes the corporate trash working for companies like Principal Life Insurance Company.