Non-GAAP Financial Measures and Your 401k

thiefInvestopedia defines “Non-GAAP” earnings as “An alternative earnings measure of the performance of a company. Many companies report non-GAAP earnings in addition to the required GAAP earnings, stating that the alternate figure more accurately reflects their company’s performance. Some common examples of non-GAAP earnings measures are cash earnings, operating earnings, EBITDA and pro-forma income.” ( Non-GAAP Earnings Definition | Investopedia  ) They include a great video that further explains this concept.

You may ask, “with all the other compliance and fiduciary issues facing the 401k investor, I gotta worry about ‘Non-GAAP,’ whatever that is?”  The truth is that the insurance industry has created  multiple methods to deceive you into thinking you are earning higher rates of return on your retirement investments than you are actually earning, and “non-GAAP” reporting is a huge bag of worms for the investor.  If you invest in SEC regulated securities, the financial institution is required to comply with disclosure requirements that provide you with comparisons of GAAP vs. Non-GAAP numbers.  But if you are investing in separate accounts through an annuity, there are no compliance requirements… and trust me, if you have your 401k with an insurance company, you can fall victim to yet another scam propagated by your service provider.  In this Final Rule by the SEC, explaining the conditions for use of non-GAAP Financial Measures, the agency adopted rules governing the use of non-GAAP financial measures.  Regulation G, as defined by the SEC covers “all public disclosures that contain non-GAAP financial measures by any registrant that has a class of securities registered under the Exchange Act.”   Your 401k separate account investments are not registered, and therefore, are not regulated under this rule.  Why is this important?  Because non-GAAP reporting includes pro forma financial information, described by Investopedia as “…a method of calculating financial results in order to emphasize either current or projected figures.”

It’s Sunday afternoon, and you decide to log into your 401k service provider’s website to review how well your 401k investments are performing.  There have been some ups and downs, but overall, you are satisfied with the results.  The charts show the value of the shares you have invested, which appear to have increased in recent weeks, and you decide to stay with the current allocation.  During the weeks that follow, there are ups and downs, but your instinct is to stay the course.  After all, you are invested for the long haul.

A few weeks pass, and you hear there is a slump in the stock market.  Some of your investments use the S & P 500 as a benchmark, and sure enough, your separateNo Accounting Tricks account investment slumped as well.  In fact, if you look at the past performance of your “S & P” related investments, they all slumped in perfect sync with the S & P 500.  Keep in mind, your service provider is using the publicly traded benchmark as just that, a benchmark, and an intelligent investor may ask why the account syncs perfectly with the benchmark.  Perhaps the best answer is that there is some manipulation by the service provider.  Remember, many of your funds are proprietary funds, offered by your service provider as a seller to the open market, but also sold to your fund as buyer representing your interest under the terms of the annuity.  When the market “slumps,” the service provider can purchase, or “sell” shares back to himself from your account, and when the market has a bullish streak, that same provider can buy those same shares on your behalf.  In other words, he can “short-sell” your fund with impunity.  You won’t see the losses (there are no wins) because he can use “non-GAAP” financial measures to shore up the account value until D-day, at which time he freezes the fund (yes, he can do that with the proper disclosure), then sells off the losers at fire sale prices, just when you are about to retire.  Of course, the “official” explanation will be that you were the victim of another “financial crisis.”

The most important factors to consider when investing in insurance company separate accounts is to establish that (1) your service provider does not engage in Non-GAAP financial measures, (2) cannot “defer” payments from the fund in which you have invested, and (3) there are no “proprietary funds” in the investment.  Finally, ask your financial advisor for his reply in writing that he is a Fiduciary as defined by the U.S. Securities and Exchange Commission, as well as the definition of Fiduciary under ERISA.  If he represents himself as a Fiduciary, ask him to verify your investments meet the criteria listed above.

 

 

 

Author: Dennis Myhre

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