Principal/Wells Fargo 401k buyout…. Winners and Losers

Since the news broke that Principal will likely buyout Wells Fargo’s book of retirement accounts by the end of March, a lot of questions remain unanswered. 401k investors should be aware how the buyout will impact their savings plan now with Wells Fargo.

To fully understand why this will be an issue, consider the following:

  • Wells Fargo is a banking system, and is regulated by the Securities and Exchange Commission (SEC).
  • Principal is an insurance company, and is regulated by the State of Iowa State Commissioner’s office. As such, there is little or no regulation by the state. As long as Principal can pay its bills, the State of Iowa could care less.
  • Federal laws apply to Wells Fargo, and if they violate the regulations, there will be penalties and other disciplinary issues to deal with.
  • States seldom impose penalties or disciplinary activity.
  • Neither Wells Fargo nor Principal are considered fiduciaries under the law.

Less regulation is a good thing, right? Actually, no… there is less oversight when the Plan Provider intentionally break the rules. When that happens, it is the investor (you) that suffers.

Wells Fargo’s ledger of corruption go back several years. Principal’s fraudulent activities date back decades… in the past 12 years, Principal and Wells Fargo have joined forces to defraud investors out of billions of dollars, with impunity.

If I were to choose a Plan Provider, the best option is to choose neither company. If you absolutely love Wells Fargo (hard to imagine), now is the time to vacate the roost. If you absolutely love Principal, now is the time to demonstrate your willingness to lose your retirement security over a love relationship that will eventually go south.

Winners…….

Both Principal and Wells Fargo will win if this deal is completed. Wells Fargo will pocket a cool billion in the beginning, and rake off billions later as a co-conspirator with Principal.

Losers….

Unfortunately, if you are now using Wells Fargo for your 401k service platform, and are invested in Wells Fargo investments, you may soon fit into the category of former Wells Fargo clients. This will be a hard pill to swallow, because you will likely lose at least 50% of the plan asset value you now own through Wells Fargo.

The reason I can make such an absurd statement is because it is true… today, as a 401k investor with Wells Fargo, you own your plan assets. Whether invested in stocks, bonds, or collective trusts, you still own your plan assets.

This fact will change overnight when Principal takes over your 401k Plan as a service provider. You may recall I mentioned the State of Iowa earlier. The state regulations state that Principal must own all plan assets!

Ownership statement found in Group Annuity offered by Principal Life Insurance Company

Principal can only offer 401k services by “selling” a Group (aka variable) Annuity. Beginning on the date Principal takes over, all plan assets in the employer sponsored 401k plan will now be owned by Principal. Principal and Wells Fargo will likely agree under a legally binding “Successors and Assigns Agreement” that your plan assets will be owned by Principal. Your monthly payments to Principal will now become nothing less than a gratuity payment… no Trustee, no Fiduciary (except your Plan Administrator), and no oversight.

Your “plan assets,” once having value, will now be a piece of paper called an Annuity. Your employer will not even read the Annuity before he agrees to the plan, because Principal will make it very lucrative for him/her to accept the language of the agreement.

At this point, your retirement plan has zero value. No longer will your Service Provider be regulated by the feds; your retirement funds will now be invested in “units of value” to be found in a “pooled separate account” (PSA) set up by Principal to mirror an investment, typically an investment bought and paid for with a portion of your money, but owned by Principal.

I say “a portion” because no-one except Principal (and Wells Fargo) will know the true value of the mirrored investment. Typically, there is seldom a run on the investment where all investors want their money, so Principal can hold back a portion to invest in other properties they will own, purchased with your money, but held hidden in a private llc for a future sale. Your PSA may have billions in potential claims against the account, yet have a value substantially less. The difference represents money that Principal (and Wells fargo) can steal by under-reporting the values of their PSA’s when reporting to the Department of labor.

Your PSA is not a legal entity…. it cannot sue, cannot be sued, and contains nothing in the form of an investment. In contrast, a “collective trust” you may now have with Wells Fargo does contain multiple investments, wrapped in a Trust and is protected from creditors. It is considered a legal instrument by the courts, can sue or be sued.

The Department of Labor also allows Principal to submit a letter of compliance stating the values reported are true, and such statement precludes an Audit by an independent auditor.

If you have a grievance to be settled in court, you do not have ERISA on your side, because ERISA does not regulate insurance companies. The Judge will consider your complaint under common law, and since Principal now owns all plan assets, you will not have a case.

At this juncture, you may be reluctant to move your 401k to Principal. well, the good news is that this week Wells Fargo CEO Tim Sloan resigned his position. Sloan and Principal Financial were likely fraudulent co- conspirators for several years, and with Sloan out of the picture, I doubt the buyout will take place, so breath easy…. come to think of it, Wells Fargo still stands out as the most corrupt company in the USA today, so you may want to move your plan anyway.

Insurance companies have a sweet deal when it comes to offering 401k options to their clients. Don’t become another victim….

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Author: Dennis Myhre

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