Plan Failure and Your 401k…

Plan FailurePlan Failure was a reality for millions of 401k investors in 2008 and 2009, when insurance companies like Principal Life Insurance Company raped and plundered millions of their own client accounts to keep their company afloat.  Unlike most banks and financial institutions regulated by the Federal Deposit Insurance Corporation, insurance companies remained unregulated in the years leading up to the 2008 financial crisis…

When banks could no longer make loans to developers due to margin requirements, insurance companies flush with investor’s retirement cash stepped in, offering short term high interest mezzanine and bridge loans to developers that were never paid back.  In Principal’s case, 401k investors accounts were illegally used as loan guarantors to banks, mostly Wachovia Bank, and later Wells Fargo Bank and Bank of America.  When the developers defaulted the loans, the 401k accounts were forced to not only reimburse the banks for defaulted mortgage loans, but also paid the accrued interest.

In Florida, Principal purchased on behalf of one of their 401k separate accounts, at least one commercial property from a developer to whom Principal had previously loaned millions of dollars to build the warehouse facility.  Principal then bundled the defaulted mortgage, now owed by the 401k investors, in a commercial mortgage backed security and sold the CMBS to investors.  As the record-keeper for the 401k account, Principal was to repay the mortgage loan to the lender, who was themselves.

Principal failed to make any payments, intentionally defaulting on the loan to themselves.  With Principal’s authorization as lender, the CMBS Trustee foreclosed on the warehouse, selling it at auction to an affiliate of the original borrower, who brokered the purchase by the new buyer.  The auction generated just enough income to repay the loan with interest to Principal, and the 401k account holders lost millions in the foreclosure.  This type of fraud probably occurred multiple times, yet the Security and Exchange Commission has failed to bring then CEO Larry Zimpleman or his co-conspirators to task for their crimes.

Few depositors knew what promises Principal made to their employers to “earn” their business, but any uncertainty became clear when their account balances began to plummet.  Within months, the retirement accounts were devalued to less than one-half the value reported prior to 2008, and the plunge continued well into 2009 and 2010.  Using their Plan Sponsors as scapegoats, Principal successfully dissolved the net worth of millions of employee 401k accounts.

The Obama Administration later gave the financial institutions a free pass by agreeing to pay the government a small penalty in exchange for the government signing a “non-prosecution agreement” or a “deferred prosecution agreement.”  Sadly, by using the excuse that these financial institutions were too big to jail, the United States Department of Justice “forgave” the debt owed to millions of American workers.

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Wealth Management.com recently published a brief, but interesting article concerning the risks of retirees failing to meet their standard of living through retirement no matter how long they live.  Entitled What the Heck is “Plan Failure”? , the article briefly outlines possible causes for “Plan Failure,” and their remedies.

The article draws from a blog post published by blogger Dirk Cotton, called Three Degrees of Bad.  Cotton is a retired executive of a Fortune 500 technology company. Since retiring in 2005, he has researched and published papers on retirement finance, spoken at retirement industry conferences and events, and regularly posted on retirement finance issues at his blog, The Retirement Cafe.

Both articles focus on the impact  that “plan failure” has on a retiree’s standard of living, and described ways in which one can safeguard their core income source.  Plan FailureDepletion of your investment portfolio will definitely impact one, if not all, of the levels contributing to your safe Standard of Living “floor.”  Social Security benefits and  fixed annuities frequently provide the floor of benefits, where only Bankruptcy can impact that security.

Market risk plays a key role in what is often referred to as ruin, described as  “The complete loss of one’s money and other assets” by the Oxford Dictionary.   While both articles are well written and provides the reader with incentives to better protect their financial assets, they fail to clearly address a growing concern for retirement investors today, that being financial fraud. Most frauds are perpetrated outside the “market risk” profile, usually involving plan providers selling their off market proprietary funds to unwary 401k investors.  This practice contributed largely to the millions of investors who experienced “plan failures” during our last financial crisis of 2008-2009.

Plan Failure and Financial Fraud….

Financial fraud must be addressed openly and candidly to reach investors.   History will repeat itself, and the past fraudulent activities of financial institutions like the Principal Group of Companies must be exposed for the benefit of future investors.  Principal has targeted mostly small to mid-sized employers for a reason.  Not only  do these individuals put aside hard earned income for a future benefit that seldom materializes, but they seldom complain or take action when abused by companies like Principal.  The employers are often the Plan Sponsor, with little or no knowledge of investment protocol.  They rely on the Plan Service Provider to give them straight answers, leaving them open prey for unscrupulous financial care-takers. 

Litigation no longer works.  Plaintiff’s law firms and judges can be bought by the defendant corporations, and where a plaintiff’s award could be in the hundred’s of millions of dollars, there is a lot of incentive to tweak the system to favor big money.  The legal and investment community view these plaintiffs as a resource for funding corporate growth, and stealing from them, in their minds, is a victim-less crime.  

Under the Obama administration, the Federal government and corporations had a free rein on stealing from the American worker.  There was no accountability, and there remains today within the retirement industry a “house of cards” mentality, that if any insiders were to expose these crimes, the entire system would collapse.  Unfortunately, most workers today continue to pay into a system that has already collapsed.  A clear sign of this is the push-back that trump is getting from his own party because he doesn’t play by their rules…. these congressional leaders receive huge paybacks from Wall Street to hide their heads in the sand, and it will take a loose cannon like Trump to crumble the system. 
Unless millions of 401k investors are educated and made aware of this conflicted practice, history will repeat itself in the next financial collapse as well.

 

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Author: Dennis Myhre

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