Principal takes over your Wells Fargo 401k… the Good, Bad, and Ugly

You may have just learned that Principal has purchased your 401k Plan recordkeeping from Wells Fargo for over a billion dollars… should you be worried? With all the negative press about Wells Fargo lately, what else could be worse? These are questions that 7.5 million retirement savers are asking themselves, and their bosses, this week.

The Good….

With all the bad news about Wells Fargo these past months, one could consider the sale of your 401k a good thing, and you would be right. Wells Fargo’s misdeeds over the past several years has finally reared its ugly head and has been exposed. After extensive investigations by Federal regulators, we still know very little about the why of what has happened, and it is likely we will never know the whole story.

With that said, can we presume this pending purchase will be a good event for 7.5 million investors? Or is this simply another ploy to victimize even more clients by what now appears to be a ruthless and corrupt organization?

The Bad….

If you had a complete study of Wells Fargo’s standing in the financial world when comparing their 401k plan earnings to the benchmarked ratings, one could say that Wells Fargo should have done a better job of providing investment management skills for their clients.

Approximately 70% of their recommended funds have underperformed the Morningstar assigned benchmark since their inception, while 30% have outperformed their benchmark. Finally, these outcomes are considered to be 95% confident that their funds will continue to perform at this same level into the future.

It is easy to observe that with these results, having Wells fargo as your Plan Provider historically may have not been the best choice. But did Principal perform any better?

Applying the same metrics, 50% of Principal offered funds underperformed, while the other 50% overperformed. these metrics are believed to have a 97.5% confidence that such outperformance will persist as opposed to being based on random outcomes.

In other words, neither company has really stood out historically as overperforming when compared to the benchmarks provided by Morningstar research. (information for the above was found on Index Fund Advisors, Inc. website)

and The Ugly….

So now you have to make a decision… as an employer (and most likely the Fiduciary), should you simply “go with the flow” and stay with Principal, or is now the time for a change of Recordkeeper and Plan Provider for your employer-sponsored 401 Plan for your employees?

Your first thought may have been that you had already considered your options, and with all the negative issues with Wells Fargo, most likely had decided to move your 401k plan to another provider. You simply hadn’t had the time to make the change, and with Principal now in the picture, you may rethink your options.

If you have been reading my posts, you already know I am no fan of the Principal Group of Companies. My conclusion is based on good reason and facts about Principal that you may not share. That’s ok, because I am not publishing these posts to tell you what to do. You have to make those choices; I am simply voicing concerns and options. If Principal offers you money to stay with them, keep in mind you, as the employer, must keep the best interest of your employees. If that discussion takes place, discuss it with your legal advisor.

Principal shares a lot of commonality with Wells Fargo where it applies to fraud and corruption. In fact, the two companies share the same interests, and often support public “feel good” events each will sponsor.

If you can put aside the “likes and dislikes” and focus on outcomes, you will be approaching alpha when it comes to meeting your needs as a Fiduciary for your plan. The first approach is to sign unto BrightScope.com (its free) and find your plan. chances are it has been evaluated and it will be assigned a value when compared to other plans.

Most Principal sponsored 401k plans rank in the mid-fifties rating, meaning that when compared to similar plans, Principal returns are typically among the lowest in the peer group, which means your employees have to work more years or lose what is represented by the rating percentile.

For example, my former employer has used Principal as a service provider for over 20 years, and today the BrightScope rating was 49%…..

https://www.brightScope.com/

A major concern should be the fact that Principal will want you to purchase a Group Variable Annuity with the employee owned plan assets in your 401k plan. Those plan assets are owned by your employees, and it should be their choice as to whether or not they want to give those funds to Principal.

These will be difficult decisions, and they will need to be made in the best interest of your employees. You, as the employer, and most likely the Fiduciary, cannot rely on the advice of your Principal Advisor… if he/she provides erroneous information, you are the one who will be responsible. Any questions you will have must be addressed with your legal advisor.

Share:

Author: Dennis Myhre

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