Is Your 401(k) at Risk?
Imagine that you and your wife will turn 65 years of age within a few weeks, and together have almost a million dollars in your 401(k) plan through your employer. A few weeks before your 65th birthday, you receive a notice from your plan provider, in this case an insurance company, that in order to “protect”
all investors and to limit risk in your elected investments, the insurance company has been forced to enforce an option contained in the variable annuity attached to your plan, that option being to initiate a withdrawal restriction.
Your first thought is that they can’t do that because your plan allows you to withdraw all funds when you turn the age of 65. The so-called withdrawal restriction simply does not apply to either you nor your wife. A few weeks later, after you have both turned 65. you call the plan service provider to roll
your investments into an IRA, the typical procedure many investors follow at retirement. When the customer service representative is told of your intent, his reply is, “you don’t have any money in a 401(k) with our insurance company!” Shocked, you repeat your request, only to be met with the same answer…. with the added comment than the insurance company owns all plan assets under your plan, and that you simply “own” units of an investment, which can’t be released as funds at this time.
Now panic begins to set in, because you have noticed the value of your investments have been steadily declining in recent weeks, and you want to move them into a more secure investment. You have just been entrapped by the “reality” of investing in a 401(k) plan, and before your saga is over, your 401(k) investments will plummet in value through no fault of your own or the current market conditions.
You begin to cope with the realization your retirement will dissolve into oblivion, so you fight back. You contact the Department of Labor, but they explain they cannot advocate for one individual, but rather an entire class of investors, but you can still sue under ERISA for damages if warranted. As the weeks pass, you discover that they only individual that is considered a “fiduciary” of your plan is your plan administrator, typically your employer. You can certainly sue him or her if the situation warrants that action. But you have worked for that person for 25 years, and consider him a friend. Besides, he was as blindsided and confused as you were by what is happening; certainly he did nothing wrong.
If you file a complaint with the DOL, and they determine your employer failed as a fiduciary to represent your best interest, they will ensnare your employer in litigation, eventually levying a heavy fine and possibly restitution. If they determine the plan provider, aka insurance company, stole your money, the Department of Labor will do nothing, since the courts have decided the plan service provider is not a fiduciary.
If the insurance company violates Securities and Exchange Commission or Internal Revenue Service regulations, a heavy penalty may be levied by those agencies, but there is no restitution. In fact, under Non-Prosecution Agreements (NPA’s) and Deferred Prosecution Agreements (DPA’s), the U.S Department of Justice will often write in waivers that prevent the investor from pursuing any form of restitution, at least under the Obama Administration.
Okay, your plan loses value, but exactly where does the money go? The general thought is that financial meltdowns occur when the stock market plummets, and this is certainly true. But as a 401(k) investor, financial meltdowns can often be leveraged with the right plan allocation. When you buy investments that offer a range of risk factors from conservative to speculative, a sudden meltdown will have less of an impact on your 401(k) balance. But there are exceptions to this rule. A little known fact in 401(k) investing is that investing through an insurance company will dramatically increase your risk of loss in a downturn.
Risk of Losing Control….
If you were to read the “fine print,” which typically you will never see, today most separate accounts offered by insurance companies have what I refer to as “escape clauses,” written in fine print stating the service provider can “freeze” your funds. You won’t find this escape clause in non-insurance company offered plans, since you, the investor, own the plan assets, usually in the form of stock purchases, and those shares cannot be frozen.
The likelihood that your plan is frozen depends upon which insurance company acts as the service provider for your 401(k). Principal Life Insurance Company froze their Principal U.S. Property Separate Account (PUSPSA) on September 26, 2008, locking out hundreds of thousands of investors from accessing to their funds. Approximately two years later, when the so-called withdrawal restriction was lifted, those same investors had lost almost 50% of their investments, totaling almost $4 billion. The Department of Labor investigated, but did nothing. The SEC may have taken some form of enforcement action against Principal, but that action was never made public.
Since that time, it has been determined those so-called catastrophic losses were for the most part reported as “unrealized losses,” meaning losses estimated and determined by senior management, but not yet realized. While Principal reported almost 50% in unrealized losses in this one 401(k) investment, their overall corporate realized losses reported to the SEC for that same time period was less than 5%!
The main factor that played a major role in their low ratio of realized losses during the financial meltdown was that Principal “sold” their troubled assets, including defaulted loans they had made to developers, to the PUSPSA while it was frozen. In other words, the PUSPSA became a cesspool of bad investments and loans Principal had been engaged in prior to the meltdown in 2008.
If you find the above statements to be incredulous, than you will be shocked to learn that the Managing Director of Acquisitions and Dispositions for this same commercial property account was a crack cocaine user, later to be arrested in Des Moines, Iowa for kidnapping a victim at gunpoint in order to find drugs!
Everything in this post is well documented and proven, yet the perpetrators of this massive financial fraud against possibly millions of investors between 2008 and 2010 continue to function in the same or better capacity as they did during the financial meltdown.
The federal agency of “last resort” is actually the best option for investors to recover their losses from this type of fraud…. the Office of the Comptroller of the Currency (OCC) regulates financial institutions, specifically those that are insured under the FDIC, but is also assigned the responsibility to protect consumer rights. As such, the OCC does regulate Principal Bank, which includes their mortgages and other banking activities. In the case of Principal Financial, most of their activities centered around mortgage origination fraudulent acts, in which the PUSPSA was used as a loan guarantor for loans made to developers by Principal through major banking systems. Later, defaulted loans were paid by the account under a “Loan Purchase Agreement” with the lender.
As an investor, you must hold yourself accountable for the viability of your investment decisions. Follow up with your plan administrator, whether your employer or accountant, so they completely understand the plan documents. Ask for a copy of the variable annuity and other plan documents that govern the decision making process, and research the investment options before making a decision to invest or not invest.
Most important, do not rely on decisions of those that you know do not understand the process. Principal Life Insurance Company touts the fact that they market to small to medium sized 401(k) plans. Their logic is simple…. find the companies with the least amount of knowledge to understand the jargon or complexities involved… sell them a “plan” that looks good, and let that same employer bear all the risks when problems arise.