Is Principal Life a Fiduciary for your 401k?

Principal LifeDefinitions, duties and obligations of Principal Life….

In their sales literature entitled Investment fiduciary support services Terms & conditions , Principal Life Insurance Company defines their fiduciary responsibilities as follows:

Principal Life is not a fiduciary in the broader context of operating any plan and is not providing investment advice or any recommendation with regard to any obligation or function of the investment fiduciary support services. 

While this statement clearly explains Principal’s position as a fiduciary, let’s take a look at ERISA’s definition of a “fiduciary.”  On the Topics page of the Department of Labor website, that agency clearly defines exactly who a fiduciary is by definition:

The Employee Retirement Income Security Act (ERISA) protects your plan’s assets by requiring that those persons or entities who exercise discretionary control or authority over plan management or plan assets, anyone with discretionary authority or responsibility for the administration of a plan, or anyone who provides investment advice to a plan for compensation or has any authority or responsibility to do so are subject to fiduciary responsibilities. Plan fiduciaries include, for example, plan trustees, plan administrators, and members of a plan’s investment committee.

When reviewing both responses, there are important distinguishing factors to understand.  ERISA includes those persons who

exercise discretionary control or authority over plan management or plan assets, anyone with discretionary authority or responsibility for the administration of a plan, or anyone who provides investment advice to a plan for compensation or has any authority or responsibility to do so are subject to fiduciary responsibilities.”

Principal, on the other hand, claims to not be a fiduciary because they are not:

“operating any plan and is not providing investment advice or any recommendation with regard to any obligation or function of the investment fiduciary support services.”

Principal is qualifying their non-fiduciary position based, in part, on any obligation or function of fiduciary support services.  In litigation involving Principal and most 401k plans, Principal will emphatically deny any role as a fiduciary.  Most court decisions support that supposed fact and deny plaintiff’s recovery for fiduciary related matters.

Principal employees file a breach of fiduciary duty class action and win their case…

A recent court case is the only exception, where  their own employees filed a class action for a breach of fiduciary duty.  Within weeks, Principal reached a multi-million dollar settlement in which they agreed to make changes to be in compliance with their fiduciary responsibilities.  While a presumption of guilt, Principal continues to provide those same conflicted services to millions of investors, fully aware their plan sponsors are in a breach of their fiduciary duties to their employees.

The Department of Labor does not require  insurance companies to be in compliance with ERISA regulations…

ERISA clearly states that fiduciaries include Plan Administrators, typically the Employer or Plan Sponsor.  No mention is made of a “Plan Provider,” a title commonly provided to insurance companies or financial institutions.  Yet, under a 401k plan obtained through an insurance company, no trustee is required.  When your employer sends your contributions to Principal, and your plan consists of a group, aka variable annuity obtained through Principal, no Trustee is required under ERISA.  In fact, ERISA does not even regulate insurance companies, that responsibility being delegated to the State of domicile for that insurance company.  Yet, we always hear about ERISA compliance when discussing 401k plans.

For example, do you have an ERISA compliant Summary Plan Description (SPD) document? Many employers are unaware of the SPD requirements under the Employee Retirement Income Security Act (ERISA) of 1974. Certificates of Coverage (COC), Certificates of Insurance (COI) or general insurance contracts issued by insurance carriers are not SPDs.   Typically, COCs and COIs are not ERISA compliant and are meant to be supplemental to the plan’s SPD. Insurance companies write their certificates and booklets in order to be compliant with insurance laws; complying with ERISA regulations is the job of the plan administrator. 

If you fail to comply with U.S. Department of Labor (DOL) regulations regarding SPDs, you can be subject to fines for non-compliance as well as greater exposures during an audit. If you have not done so already, add SPD preparation to your list of compliance items to be sure you have in place.  If your employees are receiving certificates or booklets from your insurance companies but not ERISA compliant SPDs, you could be subject to serious fines if you are audited by the DOL.  (source: http://www.hni.com/blog/hr/summary-plan-descriptions-and-wrap-documents )

In 2010, a federal district court denied class certification in a lawsuit relating to the rollover of funds from 401(k) plans nationwide for which Principal Life Insurance Company provided retirement services.  that decision is reflected in a memorandum sent to clients by the Groom Law Group:

“In Walsh v. Principal Life Ins. Co., the U.S. District Court for the Southern District of Iowa rejected many of the arguments that the plaintiff made in support of her claims that Principal Life and its affiliate, Princor Financial Services Corporation, were acting as Employee Retirement Income Security Act (ERISA) fiduciaries in communicating with plan participants about the rollover of their plan account balances into Principal Individual Retirement Accounts (IRAs).The court held that for the case to proceed as a class action, the plaintiff had to make a prima facie showing that the issue of whether Principal qualified as an ERISA fiduciary could be resolved on a class-wide basis.

The court rejected plaintiff’s argument that Principal became a fiduciary when it sent letters to terminated participants asking them to contact a Principal representative to discuss their account balance because the letters were sent for Principal’s own purposes, not for plan purposes. The court said the argument was contradictory because a person is not a fiduciary unless the action at issue amounts to management or administration of the plan. The court also noted that a third party service provider is not a fiduciary to the extent that it acts as a salesperson and does not provide investment advice or act as an agent for the plan administrator, the memo said. 

The court also rejected plaintiff’s argument that Principal was a fiduciary because, in sending the letters, it acted outside the framework of administrative policies established by the plan. The court said the fact that an action is taken outside the framework of plan policies is not alone enough to qualify a person as a fiduciary—the action itself must constitute an exercise of discretionary authority or control over plan management or administration.  The court also found that the fact that Principal had access to and used plan confidential information for its mailings did not support a conclusion that Principal acted as a fiduciary even if it allegedly used the information for its own benefit. 

The court rejected plaintiff’s argument that Principal could be a fiduciary because it exercised “control” over the disposition of plan assets by inducing the participants to rollover their plan account balances, saying that for Principal to qualify as a fiduciary, the plaintiff would need to establish that Principal, not the participant, controlled the decision to rollover the funds.  

Finally, the plaintiff said Principal was a fiduciary because, in communicating with participants, it provided investment advice within the meaning of ERISA. The court concluded that, under Department of Labor regulations, fiduciary status turns, in part, on whether the advice was regularly provided and whether there was a meeting of the minds that the participant would use the investment advice as a primary basis for making investment decisions, and these questions could not be answered without looking at the individual interactions between Principal and the participants; thereby precluding the possibility that the case could proceed as a class action. 

The court also found that reliance and loss causation could not be established on a class-wide basis since whether a participant relied on Principal’s sales efforts depended on the individual interactions between the participants and Principal. The court noted that recordings of several phone calls between participants and Principal showed that the substance of the conversations varied extensively and that some participants placed minimal importance on the information provided by Principal.  (source: https://www.planadviser.com/court-finds-principal-not-a-fiduciary-in-401k-rollover-case/)

  The above conclusions reflect the climate of our judicial system today, and it’s tendency to favor the defendant in fiduciary cases.  Principal Life owns all of your retirement income, and they do not relinquish control without a battle.  You own no plan assets, have no voting rights, and common law favors Principal in any court case involving your money.  Since Principal owns your money once a deposit is made, common law states the money belongs to Principal.

Keep these facts in mind the next time your employer withholds a portion of your income for retirement investing with Principal Life.  Principal thanks you for your generosity.

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Author: Dennis Myhre

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