Safe Harbor and your 401k Plan… in recent years, employers (and employees) have been bombarded by politicians and Wall Street trying to convince working Americans to invest in a 401k plan at their workplace. According to the American Benefits Council, in 2018 there were approximately 80 million active 401k savers, and $6.2 trillion in plan assets… add in another $9.2 trillion in IRA savings, and the totals exceed the GDP of China and Germany combined!
401k plans are offered by hundreds of financial institutions nationwide, including dozens of insurance companies. Principal Financial Services recently reported that the company has over 10 million 401k plan participants, ranking them in the top three service providers in the U.S. offering retirement plans to their clients.
Insurance companies are unique to the 401k industry, because their main products consist of a variety of annuities rather than actual Securities & Exchange Commission (SEC) regulated investment options. During the recent past, annuities have gained interest as an investment modality in the retirement field, despite their complexities and high fees. In fact, the SEC published a brochure cautioning investors to educate themselves when it comes to investing in annuities, and more than one investment firm has a focus to educate the public as to the hazards of annuity investing.
I have posted several articles regarding the purchase of annuities, warning of their elevated risks. Annuities took center stage in 2019 following the passage of the Setting Every Community Up for Retirement Enhancement Act, commonly known as the SECURE Act. Federal legislators enjoyed once again the flow of millions of dollars in lobbyist’s “financial support” from the insurance industry as a result, since the SECURE Act shifted the focus of a growing interest in 401k plans to those annuity based plans offered by insurance companies. Principal Life Insurance Company offers more annuity based plans than any other insurance company. While they market those plans that offer “guaranteed annuities” to provide a fixed income based return during retirement, their main book of business continues to be “group variable annuities,” which offer no guarantees and often fail to earn significant financial gains for the 401k investor.
What is the meaning of “Safe Harbor?”
Within the context of 401k plans, the term “Safe Harbor” has a dual meaning. If we search out the definitions of “safe harbor,” “The Balance” offers the universally accepted definition as stated below:
“A safe harbor 401(k) is a type of retirement plan that helps small business owners accommodate the Internal Revenue Service (IRS) nondiscrimination test. It’s a way to structure a plan that automatically passes the test or avoids it altogether. The nondiscrimination test requires that an employer must make contributions to each employee’s plan equaling the same percentage of salary for everyone.”
In contrast, Principal describes “safe harbor” as a new provision of the SECURE Act that provides an added layer of protection for Plan fiduciaries. The Act includes a fiduciary safe harbor for selecting a lifetime income (annuity) provider as follows:
“Fiduciaries are offered an optional safe harbor to satisfy the prudence requirement when selecting insurers for a guaranteed retirement income contract. The safe harbor protects plan fiduciaries from liability for any losses that may result to the participant or beneficiary if the insurer is unable to satisfy its financial obligations under the terms of the contract.”
The “Safe Harbor” referred to by Principal and included in the SECURE Act is designed to separate you from your 401k savings account funds, by removing your Plan Fiduciary’s legal responsibility under ERISA. While the “Safe Harbor” applies to any “guaranteed” retirement contract, your Group Variable Annuity is NOT a “guaranteed” product, and your Fiduciary retains all the risks. Principal fails to fully explain this feature of the SECURE act, and in failing to do so is mis-leading your Plan Fiduciary.
To begin, Principal will immediately “take” ownership of your deposits as agreed to by your Plan sponsor with Principal when your plan’s variable annuity is purchased. Your deposits now become monthly premium payments to Principal. You no longer will own, nor control, your retirement investments. The routine you go through on your Principal account log-in is nothing more than purchasing phantom units of value in Fund of Funds investments offered by Principal Funds.
Investopedia defines a “phantom stock plan” as two options…“The two types of phantom stock plans are “appreciation only,” which doesn’t include the value of the underlying shares, just the increase in stock over the amount of time the shares are held; and “full value,” which pays the underlying value and the amount the stock increased while it was held.”
Your 401k plan option resembles the “full value” version of the phantom stock plan. Of course, the insurance industry cannot legal “sell” phantom stocks to the public, so the plan offerings are renamed as “pooled separate accounts,” but essentially they both possess identical features. You “own” units of phantom stocks, since physical ownership does not exist. Since your money is used by Principal to purchase the investments on the open market, then “sell” units in these investments to their clients, you are reimbursed “full value” when your pooled separate account is closed at retirement.
You will never know the investments you have units in, and their values will never be disclosed. Principal is your only source of information regarding value of these phantom shares, and they cannot be owned by you nor traded by you on the open trade market. Essentially, your entire portfolio of “investments” with Principal will be unknown through the life of your plan, and it’s true value will never be known, even to your employer or Plan Fiduciary. You are kept completely in the dark concerning every aspect of your savings plan.
Principal functions under a plan of “mushroom management.” After saving for 20 years, you will discover Principal has kept you in the dark and fed you bullshit the entire time. When you try to sue your Fiduciary for an ERISA violation, your Fiduciary can now plead “safe harbor” as a defense under the SECURE Act, and you will be left holding an empty bag of retirement dreams, just as millions of 401k retirees that went before you.
The only way you can save yourself the agony of losing your retirement savings to a corrupt company like Principal is to convince your employer to act NOW with due diligence and review the facts. I am not the only blogger spitting out facts about Principal. There are millions of individuals like yourself that regret doing business with Principal, and hundreds of other websites warning 401k investors of the pitfalls that await them if they invest in annuities, including the SEC! Fisher Investments is another website preaching the pitfalls of annuities, and a quick search of my posts will include a host of links to other sites as well.
For your Fiduciary or employer, ignorance of the facts is no longer an option. Principal’s 401k plan services continues to grow. They have over 10,000 advisors hawking their products to the small to medium sized employers. Principal targets those employers for a reason… in one word, ignorance. Most smaller employers are ignorant of the facts… they simply want to provide a savings resource for their employees. Principal has a hard sell program that snares their victims and entraps their employees. It is that simple. Do yourself a favor and recognize the signs of corruption and act upon them through a strong due diligent effort to understand IRA and 401k investing. You will be glad you did!!