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Principal In Court Over Their Own Proprietary Real Estate Investment Choice Fund Offered In 401k Plans.
By Terry Morgan, AIF
401k plans are designed to be participant directed right? Therefore the employer or plan sponsor gets to enjoy a "get out of jail card" whenever the employees are making bad investments decision right? According to Rocco Di Bruno's book on Best Practices for Investment Committees "One of the common misconceptions in the 401k retirement market is when the plan participants are responsible for making their own investment decisions (also commonly referred to as participant directed plan), then the plan sponsor is free from liability relative to the investment options. According to Rocco, this is a complete fallacy. Consider further disturbing questions for employers that sponsor a 401k plan. What happens when an employer is picking investments for their 401k plan that may not be appropriate for their employees? Or, what happens when the 401k vendor the employer picked might prevent their employees from moving their 401k money in and out of any investment choice due to market volatility inside their 401k account as the case with we are discussing today? So guess what one of America's largest 401k vendors did to participants in 2008 when one of their own proprietary real estate investment choices started to plummet in value during the real estate melt down of 2008? Principal decided to send a letter to all participants in this investment choice on September 26, 2008 across the nation that said "you cannot liquidate your money out of this fund and move it into another fund." Like the passengers on the Titantic, employees were instructed that they had to stand in line in an orderly fashion and wait to disembark while the ship slowly sank. The lawsuit (we will have a hyper link to the complaint at the end of this story), asserts that the per share value on September 26, 2008 was $704.32 and as of November 30,2009 it was $443.98. The complaint further states "Contrary to its statements about the Real Estate Property Account's low-risk profile and strong focus on liquidity, Principal's investment practices maintained insufficient liquidity in the fund to meet daily withdrawal requests, which was imprudent in light of the Fund's stated objective to incredibly........maintain liquidity."
NOT IN THE SPIRIT OF ERISA
The investment choice in question is called the Principal U.S. Property Account. It's their own proprietary fund. If you have Principal as a 401k vendor you may have this fund choice offered to your employees in your 401k plan. The complaint was received in the United States District Court Southern District of New York on December 4, 2009. Ok401k notified over 4000 of our readers of our widely read email newsletter across America in Autumn of 2008 that we thought that the actions of Principal were not in the "spirit" of ERISA and the many employer groups they serve across America. It is our position that employees should not be hindered from moving money inside their 401k plan to any investment choice they desire without penalty. It is unknown right now how many employers throughout Oklahoma and America that are affected by the Principal U.S. Property Account because not all Principal 401k plans offered this investment choice in the plan. According to Larkspur a 401k research firm in California, there are over 300 employers in Oklahoma that have Principal as their 401k vendor.
WHO PICKS YOUR FUNDS IN THE PLAN?
This lawsuit is a wake up call to employers that sponsor a 401k plan. Employers should look at their investment choices and ascertain how did this investment choice get on the menu of funds offered to my employees? Why was it offered and who recommended this fund choice to my employees? Does a 401k vendor that offers their own proprietary funds make more money on those choices rather then another real estate choice that may not have non liquidity issues? There is a fiduciary question involved. You have to determine as the employer and plan sponsor, who picks your funds and monitors the performance and suitability of the funds for your employees. Is it Principal? Is it the owner of the company? Is it the life or health insurance agent or stockbroker that brought Principal or any other 401k vendor to you? Employers today must start to recognize more then ever who is picking and monitoring the investments and what data are being used to review your funds. Is the fund performance annual data being provided by the 401k vendor? We see it all the time from employers each year saying that at their annual 401k review, the 401k vendor was the one providing the annual fund review data. They did not even seem concerned that the vendor owned most of the investments inside the 401k plan. Most people would say that this is the fox watching the hen house scenario. Yet Ok401k discovers many employers in and outside Oklahoma are perfectly content to let their 401k vendor be it a mutual fund company or insurance company provide them with their annual fund review data on the performance of their 401k plan. We don't think that is a smart scenario but more on that in a moment.
WHEN THE "POOP" HITS THE FAN, WHO IS STANDING WITH YOU THE EMPLOYER?
The big million dollar question while this lawsuit squirms its way through the court system is "who signed off on this fund and the other investments offered inside this Principal 401k plan?" You think the employer involved with this litigation has any protection if they signed off themselves on the 401k annual review provided each year by Principal? I hope not because that would be foolish yet tons of employers have no idea every day who is picking and monitoring their 401k funds and signing off each year on the appropriateness of the investment choices because this should be performed by a qualified investment advisor who will sign on as a fiduciary to the plan. Employers, as the plan sponsor, are always fiduciaries on their 401k plan and can never be removed. Yet, smart employers more then ever are hiring a fiduciary advisor who is selecting and monitoring the investments inside the 401k plan not the 401k plan vendor. Insurance agents and stockbrokers cannot be fiduciaries unless they registered under the Investment Advisor Act of 1940 and signed an agreement with the employer stating that committment to being a fiduciary. So, when the poop hits the fan in a lawsuit like this what do you think insurance agents and stockbrokers are going to say when the law suit is being filed in court regarding an inappropriate investment choice offered in the 401k plan they sold? "I ain't no fiduciary. The employer signed off on these investment choices. We're just commissioned insurance agents."
WHAT THE LETTER SAID
Ok401k would be very curious what the annual fund review data looked like that Principal provided to a plan sponsor in Summer of 2008 just before they sent this famous letter out. The letter notified participants that the Principal U.S. Property Account fund choice was imposing a withdrawal freeze, closing the Property Account to withdrawals and locking participant's retirement savings in the fund. The lawsuit is suggesting that "by preventing ERISA plans and plan participants from withdrawing their money from the Property Account, Principal forced these investors to sustain staggering losses as the asset in the fund declined in value."
THE REAL ESTATE MELT DOWN OF 2008
For some of you that may not remember what happened to real estate in 2008 or were asleep under a tree somewhere like Rip Van Winkle, real estate was in complete melt down mode. The plaintiff, Dennis P. Mullaney, a participant in his company's 401k plan contacted Principal and requested that his retirement savings invested in the Principal U.S. Property Account be withdrawn. Apparently Dennis figured out real estate was not a good place to be in 2008 and he wanted out faster then Canadian hockey fans heading for the exits in Vancouver after the USA Hockey team beat their home town boys on Sunday night. Dennis in 2008 was informed by Principal that they would not comply with his request. They said he would be put into a "withdrawal Queue." So how would you feel if one of your employees were stopped from liquidating one of their 401k investment choices inside their 401k plan? Think you may have a fiduciary problem? Apparently Mr. Mullaney, as an employee would not take this sitting down and did something about it.
PROTECTING YOUR CITIZENS
Ok401k was so appalled with the actions of Principal in September of 2008 that we promptly notified the Department of Labor and Oklahoma Insurance Department. The Oklahoma Insurance Department, like most insurance departments across America, supervise all insurance company's that sell within their border ...especially insurance company 401k vendors that are group annuity contracts. The idea is that State Insurance Departments must protect their citizens from insurance vendors that run amok or harm their buyers of products and services.
Now there is some action happening and it is going to be quite interesting to see how the courts react. Principal offered their own real estate proprietary 401k investment choice to employees in the many 401k plans they sell incredibly as a "low risk" retirement savings option with a "strong focus on liquidity." Hmmm, then why did they all of a sudden freeze 401k participants in throughout America and Oklahoma in September of 2008 from liquidating their positions and moving to other fund choices inside their 401k plans?
We at Ok401k will keep you apprised of the developments of this important law suit. Who is providing you with your 401k annual investment review? Is it your 401k vendor? Is your 401k consultant a true 401k fiduciary advisor and taking responsibility in reviewing the appropriateness of your 401k investments? Or, do you have an insurance agent/stockbroker really functioning as a commissioned agent? Please give us a call if you would like an independent fund review of any of your investment choices inside your 401k plan. Since Ok401k is totally independent and will be a fiduciary on your 401k plan, we only work for you and your employees! Call us at (405) 603 4986 or email me at terrencemorgan@ok401k.com
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Bloomberg.com Hard Hitting Newstory Reveals 401k Hidden Fees.
More then ever, employers in Oklahoma and around the nation are seriously looking at their 401k plan fees both revealed and the ones 401k vendors don't want you to know about. The reason? When the market is down, this is the time employers should be making changes or asking their 401k provider to lower these high fees that affect their employees retirement balance.
At Ok401k we have seen many great news reports from the media that educate employers about hidden insurance or mutual fund company fees. For the first time one of America' s leading business media reporters have finally got the hidden 401k fee game right. Click on the link below to access this stunning report on how your employees may be paying more then they deserve to invest in your 401k plan at work.
What is the next step? If you supervise your 401k plan, you have a fiduciary responsibility to be aware of these fees. Why? The world "fiduciary" means simply that you are responsible for other people's money. And, that means specifically your employees 401k money. Your employees are relying upon you to get them the bang for their investment buck. We can help you. At Ok401k we have a unique comparison program that reveals these hidden fees in an easy to understand and colorful report. Call us at (405) 603 4986 for your free review.
Terrence Morgan, AIF
President
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The Worst 401k Target Date Funds To Offer Your Employees Are.......
Guessing in business can be dangerous especially if you're economists on Wall Street or the trustee or fiduciary on your company 401k plan. Regarding the science of economics 101, Oklahoma's own Will Rogers once said that; "an economist guess is liable to be as good as anybody else's" Edgar Fiedler who seemed to not like Ivy Leaguers said; "Ask five economists and you'll get five different answers - six if one went to Harvard."
An Objective Analysis That Compliments Your 401k! Guessing as a strategy in trying to evaluate a target date fund inside your 401k plan could have far reaching and terrible consequences for your employees who are relying upon you more then ever to pick the appropriate menu of funds. Guessing is not an option. There are very advanced software systems leading 401k advisors use to evaluate fund choices these days. Not to be out done, Ok401k enjoys one of America's leading 401k analyzers called Fi-360 Tools software. Fi360 Tools are considered by many investment professionals to be a leading, global resource for investment fiduciaries, providing research, analytical, and reporting services. The array of products and services offered under the Tools business line are designed to aid advisors like Ok401k who serve as or support investment fiduciaries.
Pushing Their Own Choices! The first place to begin for employers in trying to decide to offer target date funds is what inventory of target date funds are available to you to select from? Is it just the ones from your 401k vendor? Many 401k vendors push their own proprietary target date funds and will not provide you access to other choices even if the other choices are better. Having your 401k provider decide your target date selection by default is like having the Captain of the Titanic tell you, "Don't worry, we only have enough life boats for half the guests on our maiden cruise but we are unsinkable, so what difference does it make?" There is a science out there in selecting 401k investments and you better be sure that your target date funds fit your employee's goals and objectives. You see, ERISA mandates that 401k Trustees (you the employer) have an Investment policy review/process in place to select and monitor your investments that are offered to your employees. You and your 401k committee should be well insulated from potential litigation if your 401k advisor has a well documented and well thought out analytical process on your investment choices and target date funds.
Last autumn 2008, I attended the Plan Advisor Magazine 401k convention. I was the only 401k professional from Oklahoma to attend this important national conference for advisors that specialize in 401k plans. Most of the leading 401k mutual fund and insurance company vendors were there exhibiting. These fund providers that sell 401k plans were of course saying that their bond funds, international funds, mid cap, small cap and large cap funds were all the best, especially their Target Date Funds.
Just Two Flavor Styles! For the purpose of this Ok401k story, target-date mutual funds come in two flavors. Unlike Braums ice cream stores throughout the southwest which has an incredible selection of ice cream from funky monkey to mint chocolate chip which is my son's favorite, you better be aware of these two different target date flavors or philosophies because the one flavor the target date fund manager uses may not fit your employees' style of investing. One target date style anticipates your worker at retirement date cashes out in their 401k and moves their money to an IRA. The second flavor or strategy is the assumption that the worker does not cash out at retirement and keeps their money in your 401k plan during retirement. What strategy is good for you and your employees? As an employer you better fully understand when you pick a Target Date Fund family for your workers, if the fund family is managing the money to retirement date or to 20 years after retirement which we at Ok401k think is ridiculous and full of liability. This is called the "Glide Path".
Retirees Are Not Leaving Their Money Behind! We asked Fidelity, one of America's largest 401k vendors, what percentage of assets do they retain when a worker retires. The answer we received was less then 50%. This means, that if all the rest of America's retirement plans are like Fidelity's 401k plans, the typical retiree is taking the money from their 401k plan faster then Johnny Depp playing John Dillinger in a bank heist movie.
Glide Path Does Make A Difference! Target date funds are the perfect auto pilot style of investing for your workers. I personally love them because quite frankly the vast majority of employees are incapable of selecting and monitoring their portfolios during the working years. Target date funds allow a worker to pick the year they are going to retire. For example, if I am 30 years old that would mean I have about 35 years to retirement and would pick the 2045 Target Date fund portfolio. The fund company then manages the money for the employee, rebalances the portfolio at least annually and diversifies it between fixed income and equities. Some target date funds are more aggressive then others and have a higher exposure to stocks. Some target date funds only use their proprietary fund managers which may be a disadvantage and some companies can have a "Glide Path" that manages the money way past the year your employee has retired which is really the "gist" of this discussion today and a name you as an employer should become familiar with. The GLIDE PATH is what can get your 401k plan in trouble folks and you better become aware what this term means.
Minus 8% or Minus 43%? Quick, what 2010 Target Date fund from what famous fund family suffered almost a 43% loss in 2008? On the other side of the spectrum, what famous 2010 Target Date Fund from another fund family experienced only an 8% loss in 2008? Which loss do you think your 63 year old worker would have liked in 2008? An 8% loss or a 43% loss in their 2010 Target Date Fund? The 2010 target date fund that lost 8% had a conservative low exposure to stocks at the workers assumed retirement age in less then two years. , the other one that lost over 43% had a longer glide path thus heavy exposure to stocks way past the workers retirement age.
Dismal Returns! Let's put this into perspective. If you averaged out all the 2010 Target Date fund returns in 2008, the average 2010 Target Date fund lost approximately 28%. So, this means that more then likely your worker with one or two years to go to retirement lost over one fourth of their retirement portfolio in a 2010 Target Date Fund which is equivalent in Ok401k's eyes to medical malpractice. Our Ok401k review of most 401k target date funds found quite a few fund managers are assuming (first three letters of assume?) that your worker will not take their money out of the 401k plan and they will keep managing it way past retirement. Is this what is going on now in your 401k plan when a worker retires?
Industry Wide Embarassment in 2008! At Ok401k we thought this was quite embarrassing to the Target Date Fund industry when the whole enrollment process to employees was to encourage them to let a professional 401k money manager diversify their 2010 portfolio, rebalance it for them and help them invest professionally for the long term! For the average Joe Blow 401k participant just two years from retirement that does not know much about investing, I thought the results were quite dismal for professional money management in the target date industry. Currently Congress, along with the Department of Labor and other interested parties, are investigating the impact of target date funds on participant accounts after the 2008 melt down.
The Glide Path Game! Now, let's finish this story up with the glide path game you better be aware of. Some target date funds, typically the more conservative ones, build their glide path to end on or about the anticipated retirement age of the participant, the "targeted date," like the 2010, expecting the participant will take the money in cash---either personally or in an IRA and make a new investment decision. That design reflects a belief that neither the manger or the target date fund nor the plan sponsor knows what the participant's retirement investment decision will be. We at Ok401k believe that this is the more "prudent" decision for the 401k committee. An employer should make sure that the purpose of a target date fund is to reduce volatility as a worker nears retirement. Some target date managers structure their glide paths, to continue beyond retirement. We think this is rather presumptuous and unprofessional and may jeopardize the employees balance at retirement. These target date fund managers have a glide path that goes almost 20 years down the road assuming that they will still be managing your employees money at retirement, thus their portfolio at retirement will be a lot more aggressive then perhaps it should be for someone at retirement. These aggressive portfolios got pounded and lost workers close to retirement a lot of money.
Bottom line? You better have a philosophy in place and understand how your employees feel about their money at retirement if you are offering target date funds inside of your 401k plan. Will they take the money and run or keep it with you till they begin to take withdrawls in retirement? Ok401k has a complete report on over 250 target date funds and their strategy. We can help you ascertain if their money management strategy fits your employee's strategy. Give us a call at (405) 603 4986 or email me at terrencemorgan@ok401k.com
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Terrence Morgan, AIF
Ok401k, Inc.
(405) 603 4986
Terrence Morgan, AIF is a Registered Representative of and offers securities though Wilbanks Securities, Inc. Member FINRA & SIPC. Securities activities supervised from Wilbanks Securities, Inc. at 4334 Northwest Expressway, Suite 222, Oklahoma City, Ok. 73116. (405) 842 0202. Fee based through Wilbanks Securities Advisory. Fiduciary status requires employer being given WSA ADV form Part II and a fee agreement must be established. |
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