The truth about ERISA regulation…. continued
The truth about ERISA regulation…. continued.
My previous post focused on how the regulators make decisions that favor the financial institution industry, and NOT the investor. The amended ERISA regulations in 2010 exemplified that fact, when they literally made it legal for service providers like Principal Financial Group to lie to investors, and in the process protected your Plan Administrator from any fiduciary breach when that false information was relied upon by 401(k) plan participants.
Two years later, in 2012, the Department of Labor again stepped in to help Principal Financial steal billions of dollars from investors. In March, 2012, the Plan Sponsor magazine featured an article explaining how the “DOL Offers Help” to insurance companies like the Principal by publishing a proposed exemption for Principal Financial Group. The exemption “permits Principal to invest client plan assets into proprietary mutual funds through target-date funds or other insurance company pooled separate accounts.”
Now, supposedly this is a good thing for investors? After all, Plan Sponsor magazine supports the 401(k) industry don’t they? Lets take a closer look at the so-called exemption. I have published the article in it’s entirety below:
DoL Offers Help
Exemption for use of proprietary mutual funds
In exchange for relief from ERISA section 406, fiduciaries relying on PTE 77-4 must abide by certain conditions imposed by the exemption: (1) the prohibition against payment of sales commissions by a plan in connection with the purchase or sale of mutual fund shares; (2) the prohibition against the receipt of “double” investment advisory fees by the fiduciary or its affiliates, with respect to the investment of shares for the period of the investment; (3) the limitation of redemption fees payable by the plan; (4) the requirement that certain disclosures are sent to a second fiduciary, named fiduciary or trustee of the plan that must approve the purchase or sale of the mutual fund shares; and (5) the approval, in writing, by the plan fiduciary of any change in the rate of fees to be applied to the plan.
The proposed Principal exemption provides similar relief for the investment or recommendation by Principal, as fiduciary, into proprietary mutual funds, directly or indirectly through Principal’s Collective Funds and clarifies, updates and improves some of the requirements of PTE 77-4:
• Unlike PTE 77-4, which requires a waiver of, or offset against, all plan-level fiduciary fees,it would permit Principal to retain plan-level fees for asset allocation services, broadly defined to include (i) the selection of appropriate asset classes or target-date glide paths; (ii) the selection of Collective Funds or mutual funds to “populate” those asset classes; and (iii) the allocation of the plan’s assets among those funds. We think this is a significant improvement, basically recognizing that asset allocation services are distinct from portfolio management.
• The proposed Principal exemption clarifies that the relief is available regardless of whether Principal is acting as a discretionary or non-discretionary fiduciary with respect to the investment (there has long been debate over whether PTE 77-4 covers non-discretionary advice).
• The proposed exemption permits the use of “negative consent” for future mutual fund fee changes based on 30 days advance notice. Fee changes may be implemented sooner than 30 days, provided that the plan receives a credit in the interim. It permits the use of “negative consent” when Principal seeks to add a new mutual fund as an investment vehicle underlying a Collective Fund.
• It permits the use of e-mails for all disclosures, subject to client consent.
• It clarifies that the exemption would permit (subject to disclosure) the use of Principal broker/dealer affiliates to execute trades for the proprietary mutual funds.
In exchange for many of these beneficial updates and clarifications to PTE 77-4, the DoL imposed several additional conditions to the proposed Principal exemption:
• In the case of an “indirect” investment in a proprietary mutual fund through a Collective Fund, only one “level” of asset management fees (plan-level, Collective Fund-level, or mutual fund-level) may be charged (via waiver or offset), even with respect to those plan assets invested in a Collective Fund but not invested in proprietary mutual funds.
• Certain new advance and annual disclosures are required.
• An independent (second) fiduciary for each client plan must receive a termination form at the time it approves the use of negative consent and annually thereafter.
• All fees must be “reasonable” within the meaning of ERISA section 408(b)(2).
Based on our discussions with DoL staff, we believe that this proposed exemption is intended to serve as a new “model” for fiduciaries who seek to invest client plan assets in proprietary mutual funds.
Stephen M. Saxon is a partner with the Washington-based Groom Law Group. Groom is one of the preeminent employee benefits firms in the country. Steve and his colleagues have worked on virtually every major legislative and regulatory initiative affecting employee benefits since the enactment of ERISA. Ellen M. Goodwin contributed to this article.
If you read this article , and understand it, you will realize this so-called exemption provides NO benefit for the 401(k) investor. In fact, it should insult the intelligence of every American worker that has their earnings committed to a 401(k) plan. This is how the truth is distorted…. An article is published in a reputable magazine intended to be read by “Plan Sponsors” or Fiduciaries, and they are supposed to come away from this article thinking this is a good thing for them and their employees, when the exact opposite is true. If fact, it was after this exemption was written that 14,000 Principal employees filed a breach of fiduciary lawsuit against Principal because Principals was selling them proprietary funds owned by Principal. And the plaintiffs recovered millions of dollars in damages!
We already know the Principal has been charging excessive fees for years, which this exemption does not permit… when it states that… “fiduciaries relying on PTE 77-4 must abide by certain conditions imposed by the exemption,” but of course, Principal can lie to your fiduciary and they are exempt from prosecution.
The closing remark places the last nail in the coffin…. “Based on our discussions with DoL staff, we believe that this proposed exemption is intended to serve as a new “model” for fiduciaries who seek to invest client plan assets in proprietary mutual funds.” For 401(k) investors, this exemption is unbelievable… and simply reinforces what I have said time and again over the past three years. It is the responsibility of responsible government to take action to entirely revamp the 401(k) system, or shred it up completely and start over. And it is imperative that the feds move ahead with this plan as soon as possible.
Predator companies like Principal Financial rely on your ignorance of the facts to pull off their crimes…. that is the reason they target small to medium sized businesses to sell their so-called financial products. Your Plan Fiduciary does not understand the system, and the Department of Labor frequently adjusts their rulings to defend both Principal Financial and your fiduciary. You and your plan is the ultimate victim of this collusion. Do your homework, understand the law, and fight the system until they get it right. Your future security depends on it!!