Principal Life can steal your retained earnings

The Office of the Comptroller of the Currency is a major federal agency that regulates the regulators, as well as the entire banking system.  In their handbook published in February, 2014, the agency cautioned bank related fiduciaries that use Principal as a service provider.   A significant portion of their handbook dealt with Assessment of Risk Management matters, including compensation issues related to Principal’s use of retained earnings.

Their publication was intended as a service industry related handbook (AM-RPPS), noting that it “provides comprehensive guidance to examiners and bankers regarding retirement plan products and services offered to customers of national banks and federal savings associations.”   The handbook is a good read for any fiduciary involved with benefit plans, and I highly recommend you to read the publication.  

On page 49, the OCC addresses the matter of whether revenue sharing payments are plan assets.  They specifically caution their industry on Principal’s revenue sharing practices, noting the The Department of Labor (DOL) issued AO 2013-03A to address the question of whether revenue-sharing payments are considered plan assets under ERISA.  Principal had solicited an AO to clarify whether they could deposit the revenue-sharing payments into its general asset accounts.  They do not establish a special bank or custodial account to hold the revenue-sharing payments. Principal makes no representations that revenue-sharing amounts it receives will be set aside for the benefit of the plan or represent a separate fund for payment of benefits or expense under the plan.   The Advisory Opinion Letter, however, cautioned plan sponsors, as follows:

“The AO cautioned plan sponsors, however, stating that they must act prudently and in the best interests of plan participants and beneficiaries in the negotiation of the specific formula and methodology under which revenue sharing will be credited to the plan and paid back to the plan or to plan service providers. Plan sponsors should understand the formula, methodology, and assumptions used in arriving at the amounts to be returned to the plan or used to pay plan service providers following disclosure of all relevant information pertaining to the proposed arrangement. Plan sponsors must be capable of periodically monitoring the actions taken in the performance of its duties to assure, among other things, that any amounts to which the plan may be entitled under the terms of the arrangement are correctly calculated and applied for the benefit of the plan. Plan sponsors should take into account its ability to oversee the service provider, including its ability to oversee and monitor the service provider’s determinations under the formula. In addition, plan sponsors must obtain sufficient information to ensure that any service providers to the plan who are paid directly are paid no more than reasonable compensation for the services provided by them to the plan.”

As a Fiduciary, failing to deal with these risks will be costly if you do not act in the Best Interest of your plan participants.  

What are retained earnings?

Because Principal believe they own all realized gains, including retained earnings, those gains, amounting to billions of dollars, never enter the investment pool of funds owned by the 401(k) participant.  To understand how this works, consider an investment in California that was sold by the Principal U.S. Property Separate Account at private market in 2015.  All properties purchased and sold by Principal involve off-market transactions, so none of the properties are publicly listed properties.

In 2009, Principal purchased for the Principal U.S. Property Separate Account (PUSPSA), a 4.6 acre land parcel located in Santa Clara County, California, from TMG Partners, described as “Santa Trinita.”  The land parcel was purchased on 10/15/09 for $11,888,000 by the PUSPSA, and by year’s end a few weeks later, the land parcel was devalued to $5,670,000 by Principal.  The 2009 PUSPSA Annual Report reported on both the acquisition and the fair value: retained earnings

This separate account was offered by Principal, and it’s allocation was described as a fixed income account to attract investors.  In this case, your money would have purchased a $12 million asset which within weeks was worth less than $6 million.  

Unallocated funds and retained earnings are held by Principal in their general account.  Both funds add up to billions of dollars annually, all money that should be owned by 401(k) investors as plan assets.  But because Principal clearly disclose that they own all plan assets, the money, in their opinion, belongs to themselves.  These funds, among other earnings, consist of net income from plan investments, and never reach the PUSPSA investment pool.  

During 2013, a new office building was constructed on the land, and on 12/30/2015, sold for $60,125,000. (apn: 205-24-001).  Notice the date of sale was 12/30/2015.  The co-partners included Principal and TMG Partners, and the gross selling price of $60,125,000 will go into the Principal retained earnings account.  Since the property is sold there is no longer a need for the shell company.  You may think at this time that your PUSPSA just made over $60 million in this sale of property that reported was “wholly owned” by the account.  But once again, you would be mistaken.  Remember, the property was sold on December 30th, and NOT December 31st…. this sale was a private, “off-market” sale, to Clarion Partners.  On December 30, 2015, a deed is filed reporting the sale of Santa Trinita Office, LLC, a shell company, for $60,125,000 to Clarion Partners.  You owned nothing in December 31st, 2015, and your plan will not show the value of that sale as credited to the PUSPSA account.  The property was removed from the account on December 30th, and in doing so, eliminated your units of value on that investment for 2015. 

Principal Real Estate co-partnered with TMG Partners to buy the land and build the office building to be sold later.  The land was purchased from TMG Partners by the account, then resold as a completed office building investment a few years later to another party for $60,125,000.  These transactions were all completed using shell companies.  The net return for investors for this property was in units of value based on GAV for the years 2009, 2010, 2011, and 2012.  The entire flow of funds involving this investment became retained earnings for Principal and their partner.  Principal successfully laundered $66,343,000 from their own clients on this one property over 5 years.  

In February of 2009, a Principal “Training Associate” compiled an Auditor’s Information Report for Plan sponsors.  On page 15 of the attached PDF form, you will find the following commentary… a few weeks later, that same Principal employee was looking for a new job:

retained earnings

Since the asset was sold before December 31st, 2015, it was NOT a gain for the PUSPSA, and the account did not share in any realized gains, or any gains for that matter.  In other words, your contributions paid over $11 million for land, and another $50 million to build the structure.  But at years end 2015, it was not reported as a plan asset, and was NOT included in the account as a plan asset, hence no value.

By year’s end 2013, the PUSPSA Annual Report shows the office, with construction completed and ready to sell, fair valued at $33,600,000.  The property is now listed as “Oakmead Tower,” still wholly owned by Principal, and construction would have been completed.  Contrary to what they reported in their Annual Reports, Principal was not the “sole owner” of this property.  In this article published February 17, 2015, it states the following:

“The deal is a score for property owners TMG Partners and its partner, Principal Real Estate Group, who first
hatched plans to put up the four-story building — dubbed Oakmead Tower — in 2008. They ended up going
spec, without a client in tow, and the project was delivered less than a year ago. Devcon Construction Inc. did the
design and the construction.”

When a federal agency cautions their own financial industry when dealing with Principal Life Insurance Company, perhaps you should take heed as well.  As fiduciaries, either Plan Sponsors, Plan Administrators, or financial advisers, you “must act prudently and in the best interests of plan participants.”

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Author: Dennis Myhre

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