Principal Life, a subsidiary of Principal Financial, one of the nation’s largest companies in the 401(k) industry, likes to portray itself as the folksy neighbor interested in your financial well-being. But as a recent settlement shows, Principal Life has no qualms about pushing its own, more expensive proprietary funds to unsuspecting employees and others in what a lawsuit claimed is a clear violation of ERISA.
At issue is a case, Anderson vs. Principal Life Insurance Company Benefits Plan Administrative Committee and Benefits Plans Investment Committees, filed in the Southern District of Iowa, (Civil Action No. 4:15-ev-00119-JAJ-HCA.) The suit alleged that Principal Life violated ERISA by selecting and maintaining proprietary mutual funds in the plans that were charging “excessive fees paid to Principal Life, for the Plan’s administrative services,” according to a Notice of Proposed Class Action Settlement. Principal denies the allegations in the lawsuit and said they were acting properly.
As a former employee of Principal Financial, I have written about what I viewed as the company’s anti-customer policies as evidenced in paying advisor-paid fees and other financial and marketing incentives to financial advisors. Financial advisors and planners received the incentives in exchange for promoting more expensive, under-performing funds compared to others that an advisor could have suggested to unsuspecting clients. Paying an advisor-paid fee, as well as other fees, is a common industry practice for fund companies that have large national wholesaler sales forces.
While the advisor-paid fee and revenue sharing deals were common when I worked for Principal from 2004 to 2008, these were very sensitive topics and were rarely discussed in sales or marketing meetings. As a matter of fact, discussing fees was dangerous territory depending on who was participating in the discussions.
Paying advisors what was essentially an under-the-table commission was considered an accepted sales technique, even when it extended into the 401(k) plan administration world where it was easier to do shell game tricks involving the mixing of administrative, recordkeeping, participant education and investment fees. When the final total expense package was presented to 401(k) plan administrators, I doubted any one of them could succinctly and accurately explain how much they were paying for any specific service to plan participants.
Of course, all of these hidden fees and phantom incentives were necessary because Principal had to support its very expensive national sales force comprised of external and internal wholesalers, and an in-house
team that would cherry pick market performance data over a specific time period to show that principal funds performed better than a competitors over a similar period. That data, plus some expensive dinners, were used to convince advisors nationwide that Principal was the best.
The net effect of the lawsuit was that “participants of the Plans paid higher fees and obtained less return on their investments,” because they were steered towards buying Principal’s mutual funds, the lawsuit said. In its defense, Principal said this practice is legal, very common, and that Principal Life’s products “are offered in thousands of 401(k) retirement plans around the country.”
In a separate letter, Principal also contended that in the Notice of Proposed Class Action Settlement issued by Judge Jarvey on August 28, 2015, the Notice “makes it quite clear that Principal denied all of the allegations asserted by Plaintiff and that, “[t]o avoid the time and distraction of a lawsuit, Plaintiff and Defendants have agreed to a settlement that involves both monetary payments to participants of the Plans and changes in the investment options and fees of the Plans.”
So Principal denied the allegations in the class action lawsuit. It then agreed to a settlement in which it lowered its fees. But we still have to wonder if these same anti-ERISA practices were also done by Principal Life against other unsuspecting 401(k) plans nationwide?
Victimizing Employees and Strangers Alike
And since these plans fall under Principal Life’s administrative umbrella, they say “there is no reason participants of the Plans should not have the option to invest in Principal Life’s products.” Maybe not, but after this class action settlement, 401(k) plan providers should make the effort to include many more competitors to Principal Life’s funds in their plan options.
Principal, which is Iowa’s largest employer, also contends it did not violate ERISA and, in layman’s terms, that they are nice guys for the most part that just happened to get caught this one time. Its 2014 annual report says the company is engaged in “the noble work that we do. At the Principal Financial Group. Every day.” It may be noble work, but it looks like some people at the insurance division missed that memo.
But what’s worse is Principal Life got caught victimizing their own employees and retirees by selling them expensive, under-performing funds, or so the lawsuit contended. If this were true (and Principal says it is not), the lawsuit contends they mistreated their own employees. Imagine what they are doing to total strangers?
Principal Forced to Cut Fees
So while Principal Life says they are nice guys, they nonetheless have agreed to a cash settlement, which is why I got my letter in the first place. In dollar terms, Principal Life has agreed to put $3 million into a settlement fund.
But more importantly, because they are nice guys who really did not do anything that egregious, Principal Life has agreed to cut its administrative and recordkeeping fees by half, from 14 bps to 7 bps. Principal said it will accomplish this by changing “the rate level for each investment option offered by the Plan to the rate level that does not include any amount for revenue sharing (which could result in a 14 bps reduction from current levels on a weighted average) and charging participants an annual fee equal to 7 bps times the amount of assets in each Plan.”
This is probably the best news in this settlement. This is because fee reductions in plans could save 401(k) and other plan participants many millions of dollars over their investing lifetimes. So it is no wonder the financial services industry hates regulation, ERISA, the fiduciary standard and class action attorneys. And all it took was one single lawsuit brought by plaintiff Krystal Anderson to force Iowa’s friendly neighborhood financial miscreant to cut its fees.
In a financial world of too-big-to-fail and too-big-to-jail financial institutions, this is a rare, but great victory for the average investor.
[…] what one writer called a “rare, but great victory for the average investor,” a class-action settlement was […]
Congratulations to the law firm of Bailey & Glasser and its partner Gregory Porter of the firm’s Washington, D.C., office who brought the suit on behalf of Krystal Anderson and other class members. Maybe we should also give credit to the judge in Des Moines who faced some significant social pressure to let Principal slide on this transgression. Principal is the largest employer in Iowa and it is likely the judge may have run into someone from Principal at a local little league game or the state fair who may have tried to pressure him or her. I am also a former Principal employee and should receive some gas money as part of this settlement, but the fact that Principal victimized its own employees so their executives and their cohorts could make a larger bonus was not unexpected. It’s part of the Principal culture. My financial advice to any individual investor is never buy a mutual fund from an insurance company. Never. They have too many salespeople to pay and their [pay is your financial loss.
Thank you for this well written article. I am a victim of Principal. I work for xxc County as a judge. I trusted the advisor until he was caught being dishonest. (Name of the county was edited out. It looks like Principal engages in unethical conduct.)
Mr. Epstein,
I found your website while googling Anderson v. Principal Life and find your comments interesting. I have investigated Principal for several years with a focus on ERISA violations, but, as my website shows, Principal’s standard of misconduct could be considered extensive by most ethical standards. Ironically, the industry media leaders tend to ignore Principal’s compliant and fiduciary shortcomings.
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