Few 401(k) investors fully understand their account valuation process when investing in insurance company separate accounts wrapped in a variable or group annuity.  When you own your own plan assets, which you don’t in a separate account, the process is straightforward.  Your allocation is valued at market value, and your investment account is maintained individually as are other existing accounts, in a commingled investment.  While the retirement accounts may be “commingled” investments, they are not pooled.  When you invest with Fidelity Investments, for example, you own your investments.  They are treated as plan assets, and you profit from the gains or losses.  Your plan assets will be commingled with those owned by other plan participants, but the net earnings are yours… no-one can steal the income from your realized gains.  This is important today as financial markets flourish.  If you are investing with an investment firm that is NOT an insurance company, you are benefiting from the growing economy.   If your retirement funds are with a Principal Life Insurance Company separate account, Principal “owns” the realized gains… you do not own the realized gains, whether from dividends, net gains from earnings, or gains from the sale of your investments.  ALL INCOME is captured by Principal… YOU derive NO BENEFIT!  This fact cannot be emphasized enough… with a separate account, Principal, subjectively decides how much money you earn on your 401(k) plan.  Principal’s auditors describe it in this language…. “the change in market value as determined by management.”  The graphic below leaves out one very important consideration.  While the illustration states that Principal reports “the change in market value as gains,” they often report the change in market value as “losses” as well.

principal separate account


In a recent blog post, I discussed comparisons of annual audit instructions and your 401(k), comparing the Principal Life Insurance Company “Auditor’s Information Report” with the Fidelity Investments Auditor’s Guide.  That discussion can be found at this link.  In this blog post, I will illustrate what I believe to be Principal’s efforts to misguide the 401(k) plan sponsor into believing certain information is true when it is not.  Keep in mind, the document in question is sent to thousands of plan sponsors each year to provide assistance in meeting requirements established by the Department of Labor as a compliance for 401(k) plan administrators.  As such, one should believe in the accuracy of the Auditor’s Information Report, both in terms of factual information provided as well as general readability.  When an Insurance Company that publishes reams of documents relating to life insurance and annuity products, fails to even correct spelling errors in  a document sent to thousands of clients, the integrity of such a document becomes questionable.  Such a document is the Principal Auditor’s Information Report.

If you open this “Auditor’s Information Report”  link, a Table of Contents is provided, referencing page numbers that do not exist in the document itself.  There are grammatical and spelling errors throughout the report that should have been corrected before publication to the public.  While there is a “New This Year” listed in the Table of Contents, I find no official publication date in the document!

In addition, the Form 5500 Certification letters are all lacking dates and were printed on out-dated Principal stationery containing their logo that was discontinued a couple years ago.  One might even conclude these letters were fraudulently used to represent certifications of past Form 5500 and were not current:

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One should expect from a leading provider of retirement products, that in the very least, the annual audit report would not contain errors typically found in a high school level report!  Principal uses the following graphic presentation to help educate clients on the various processes involved to transition your “client transaction,”  the receipt of your 401(k) contribution of income by Principal, into a “separate account unit of value.”

principal separate account

As the illustration shows, it first goes to record keeping, after which the money is placed in “accounting” and a “trade register.”  From accounting, your funds are distributed into three separate resources… the SAIN  file, the General Ledger file, and the State Street file.  We can assume the general ledger file is the Unallocated fund account found in Principal’s own general account.  I do know “State Street” is a bank in Kansas City that “independently” determines the fair value of Principal owned proprietary funds that are added to the client mix by Principal, at a value determined by Principal management.

The SAIN File can’t be adequately defined…Principal does not include it’s description in the report package provided to plan sponsors.  In all seriousness, the only reference that I could connect to the SAIN process is one in which most practicing Catholics are familiar, when “priests will  make the sign of the cross over so as to bless or protect from evil or sin.”  Being familiar with Principal’s use of investor’s funds, I can certainly see why the SAIN application could be used in the process.

Without wasting more time, my conclusions are that this illustration is simply a “Rube Goldberg” attempt to illustrate the use of a chain reaction of activities to accomplish a very simple task in a very complicated manner.  I have no other answer for this graphic.  Which leaves open the question of the valuation of your 401(k) separate account units.


To begin, it is common knowledge that the State of Iowa could not care less about HOW Principal spends your money.  And lets understand another fact.  The money does belong to you.  It doesn’t matter how Iowa spins the regulations or how Principal words their group or variable annuity.   You earned the money and it belongs to you!  I doubt very much that you will disagree with that statement.  The State of Iowa says Principal MUST own your money… Principal says they DO own your money, but let’s get real.  Ok, that problem is solved!  But hasn’t Principal already said multiple times that it is they who profit from the use of your money?  We now have a problem.   IF I asked for your money so I could build, let’s say, a mansion with the money, as all the top executives with Principal have done, would you have a problem giving me the money?

State regulators, as I have already stated, do not concern themselves with what their domiciled insurance companies do with your money, as long as the insurance companies has the ability to pay claims!  So as an investor, one (meaning you) must understand the system… Principal will use your money as they want.  Period.  The first step in this process is obvious… take ownership of your money!  the regulations clearly state the obvious…. Principal does NOT have to follow any form of regulatory process in the taking ownership of your money.

We really need to understand this concept, because, with a few exceptions, the feds feel the same way.  If you are still wondering how your so called investments are valued, simple look at the “benchmarks.”  Principal uses benchmarks to decide how to repay your money if, in the rare event, you ask for it back before you retire.  As a corporate group, institutional investors, aka insurance companies, meet occasionally to decide how to benchmark, for example, real estate.  The benchmarks draw from the very same investments that are assigned “fair values” by the companies, then those same fair values are published, as an “objective”, to meet “the NCREIF Fund Index – Open-end Diversified Core Equity, or (NFI-ODCE) Equal Weight at the portfolio level.

Now that sounds like another Rube Goldberg way of saying they will pay whatever the industry is paying.  Let’s look at a typical accounting of the Principal U.S. Property Separate Account (PUSPSA).  The following illustration can be found in Principal’s 2013 PUSPSA Annual Report entitled Portfolio Highlights illustrated here:

principal separate account

The Portfolio Highlights includes information that has no value or doesn’t not exist.  The Gross Asset Value means absolutely nothing.  It includes Principal’s fair value opinion of assets, some of which are not even owned!  It does make the account look full of money, in this case billions more in dollars, so they use it.  The Securities and Exchange commission regulates PUSPSA, the only regulated separate account offered by Principal.  If you Google “Gross Asset Value” and SEC in the same line, it will give you the “Net Asset Value,” also shown in this page.  But I digress.  Scroll down to the “performance” line and you will see what I mean by benchmarks… is it no mystery that the “performance” parallels almost to the dollar the portfolio benchmarks?  The Gross Portfolio performance will exceed the benchmark, while the net falls just slightly short.  2013 was a pretty good year for commercial property prices, being five years out of the financial crisis, yet the net returns are below the so called benchmark.  The benchmark, by the way, includes the PUSPSA!

I realize I haven’t done a very good job of answering the question posed concerning the valuation of units… and I believe you can appreciate the challenge of finding an answer where one simply does not exist.  While I have not researched other separate accounts offered by Principal, the PUSPSA remains primarily a fictional accounting of Principal holdings.  The separate account reflects no intrinsic value for the investor, except for “units of value” that either do not exist, or if they do exist, cannot be defined by generally accepted accounting principles (GAAP), a common set of accounting principles, standards and procedures that companies must follow when they compile their financial statements.

Posted by Dennis Myhre

Beginning in 1968, Dennis Myhre has enjoyed a successful career in investigative research, including involvement in several specialty assignments such as the investigation of transport related damages to new production motor vehicles originating from Detroit. His team related research formed the foundation of car hauler designs still in use today by the rail transport industry. Other successful investigations include identifying two major recreational vehicle manufacturer's safety violations and the short selling of investment products by a Registered Investment Adviser. Dennis' early career as a claims investigator included specialized training and active employment in pre-trial investigations on behalf of defense firms, accident reconstruction, and major loss settlements. In 1991, he and his wife Audrey contracted with a major catastrophe services organization, and for the next 20 years, worked as adjusters and supervised adjusters, resolving thousands of claims involving virtually every major national disaster, beginning with Hurricane Andrew. Beginning in the early 1990's, their employer offered a 401(k) Plan with Principal Life Insurance Company, and for the next 16 years, Dennis and Audrey contributed the maximum allowable into the Plan. In early 2008, they transferred their entire retirement savings into the Principal U.S. Property Separate Account, a fixed income account offered by Principal. On September 26, 2008, a withdrawal restriction was announced, and withdrawals were restricted for the next three years. Both Dennis and Audrey were 65 years of age, and they were convinced the plan definition of retirement would permit them to withdraw their funds and continue to work. After several months of discussion with Principal, the Myhre's were notified that Principal had "redefined" the definition of retirement to include separation of service. Reluctantly, Dennis and Audrey were both forced to resign their positions with their employer to recover their remaining account balances. Between September 26, 2008 and December 31, 2009, the net asset value of U.S. Property Separate Account plummeted by almost 50%. Through exhaustive research, Myhre has since uncovered self dealing and fraud involving Principal's activities during the account withdrawal restriction, and his research was brought to the attention of both the Department of Labor and Principal's Chief of Compliance, with no action taken by either party. Because of the lack of enforcement of ERISA regulations by the Department of Labor, this website is intended to educate investors of the pitfalls of investing in separate accounts offered by insurance companies.