How is the value of a separate account determined?
Recently, I happened to find a Transamerica Retirement Services brochure online that was entitled “Separate Accounts 101.” . With a sub-heading called “Simple solutions for your retirement,” The four page brochure outlined briefly and concisely the basic properties of a separate account. I was most impressed by the narrative they used to describe how the unit value of a separate account is determined:
You may also recall a recent post in which I then used an illustration from Principal Life Insurance Company that supposedly answered that same question. At the risk of redundancy, I have re-published the Principal illustration in this blog post as well, shown below.
In this “Rube Goldberg” example of a chart, what goes in as a “client transaction,” comes out as a separate account “unit value.” Between these two events is a hodgepodge of events that precede the transformation into a plan asset owned by Principal, and where you take ownership of a “unit of value.”
If I was a plan sponsor, or in a fiduciary position for a 401(k) plan, I would be more comfortable explaining the above, in simple, understandable terms. Either Principal fails to understand the program themselves, or they intentionally confuse the investor by providing the nonsensical chart.
You must understand the “system” in order to make an educated decision concerning the placement of your investments. Fees can be an important issue, but in today’s non-compliant environment, virtually anything can, and will, happen with your money. Do not assume anything… every sales brochure you are handed by a sales person will contain disclosures you must read to be informed. Those are the rules… anything can be stated as long as there exists a disclosure in writing to refute statements made by a sales person. The first place to review disclosures will be on the very last page of the brochure, at the very bottom of the page, and in the smallest letters possible. Therein lies the most important part of the brochure.
Watch the labels, or the description of investments. My favorite is “gross asset value (GAV).” The term will mean nothing to the astute investor. No-one benefits from the GAV of any asset. Look on the Securities and Exchange Commission (SEC) website for a definition of “Gross Asset Value.” You won’t find it. GAV does play a role in some investments, like hedge funds, but as a 401(k) investors, no payable values in your portfolio will be paid at GAV.
As a 401(k) investor, I am impressed with Transamerica’s approach to educate the 401(k) investor. They accurately define a separate account as “an account established by an insurance company under state law. Assets of each separate account are separate from all other insurance company assets. Assets are pooled with the funds of other investors and invested in securities (e.g., stocks and bonds), collective trusts, and mutual funds.”
Principal describes a separate account in their annuity as follows:
“DESCRIPTIONS OF THE SEPARATE ACCOUNTS. Each Separate Account is a pooled Separate Account for use by our retirement plan customers. The funds held in each Separate Account will be invested and reinvested by us in accordance with applicable law, without regard to any investment requirements of our general account assets or of any of our other Separate Accounts.
A Separate Account consists of funds we receive under group annuity contracts or policies which permit deposit in such Separate Account and under which amounts are directed to such Separate Account. All income gains and losses (whether or not realized), and expenses from the assets allocated to a Separate Account will be credited to or charged against that Separate Account without regard to any other income, gains or losses, or expenses we might have for our general account or any other Separate Account. The assets of a Separate Account will not be charged with any liabilities arising out of the investment experience of our general account or any other Separate Accounts outside that Separate Account. We may occasionally invest the assets of any Separate Account in short-term money market instruments, cash or cash equivalents.”
The following describes how Principal will pay claims under the rider attached to their 401(k)group annuity:
LIMITATIONS ON TRANSFERS AND PAYMENTS FROM A SEPARATE ACCOUNT INVESTMENT. In general, transfers and payments from a Separate Account Investment will be made within seven Business Days after the first Valuation Date following the request specified in Section 8 of this rider. We reserve the right, however, to defer such transfers or payments for a period not to exceed 60 days. We further reserve the right to defer payments for an additional period up to the maximum number of days shown in the Table of Separate Account Features for each Separate Account, if, in our opinion, liquidation of the Separate Account Assets would have an adverse financial impact on other customers who invest in such Separate Account. If we defer any transfer or payment under this Section, we will determine the amount to be transferred or paid on the date transfer or payment occurs. We will notify you in the event of any deferment of more than 30 days under the provisions of this Section.
Principal can use their discretion to defer transfers from any of their plans for up to 60 days. They can also defer payments longer “if, in our opinion, liquidation of the Separate Account Assets would have an adverse financial impact on other customers who invest in such Separate Account. ” Below is a portion of a letter we received when I questioned their tactics….In other words, “The definition imposed by Principal Life Insurance Company…. adheres to our responsibilities under ERISA.” Based on this letter alone, do not assume anything…. just as this letter states, Principal Life can re-define the term ‘retirement’ if they want, and still adhere to their responsibilities under ERISA…. UNBELIEVABLE!!
“Adverse financial impact” covers just about anything Principal wants it to cover… there you have it. Read the contract, in fine print, at the last page of the Annuity rider, and there it should be. Principal does NOT have to pay back your retirement savings for up to two years if they don’t want to do so. Principal will freeze your investment(s) and shrink the performance of the investment when you cannot touch your money. Of course, when you call them and ask why they did it, they will tell you that it was your employer, as the plan fiduciary, that made them do it.
The bottom line is that regardless of where you invest, read the fine print, and understand your rights… performance counts, and if anything turns you off, trust your instincts…