Felons and fiduciaries, your 401(k) in trouble?
Felons and fiduciaries…
A decade ago, in Las Vegas, a group of individuals were convicted as felons of conspiring to commit a crime, including assault and kidnapping with a deadly weapon. They were caught, tried and convicted, and O. J. Simpson spent nearly 9 years of a 33 year sentence in prison before a parole board in Nevada set the man free on parole this week.
In Des Moines, Iowa, a few years later, a Principal Financial Corporation executive, and fiduciary, responsible for billions of dollars in 401(k) investor’s funds, was charged as a felon with second-degree kidnapping after forcing his victim into the assailant’s vehicle at gunpoint. Within hours, Mark Allen Hanrahan, age 45, filed a written plea of guilty to carrying weapons while intoxicated and solicitation to commit a felony. Hanrahan was employed as a managing director at Principal Real Estate Investors. What should have been a mandatory 25 year sentence for 2nd degree kidnapping was treated as a misdemeanor by the county prosecutor and Hanrahan was released with no jail time. For details concerning this crime, click on this link to the Des Moines Register.
While this two cases shared stark similarities, the court system granted leniency to Hanrahan, employed by a large corporate entity in the same state that was prosecuting the crime. Unfortunately, the same is true where financial crimes are concerned. Hundreds of millions of dollars are spent by financial institutions to “earn” votes through congressional lobbying in Washington. The direct result is reflected in the laws passed by Congress to “protect” investors and taxpayers in general. In reality, the laws enable financial criminals to run rampart within the industry, providing defensive walls to protect the criminals from their victims.
A white collar conspiracy…
In 2008, a conspiracy was formed by a group of white collar executives who stole billions of dollars from 401(k) plans owned by millions of investors. Fourteen months later, over $4 billion had disappeared from one 401(k) account alone, depriving hundreds of thousands of individuals of a comfortable and well funded retirement. Investigative research supports the allegation of a conspiracy, but today those same conspirators still roam the streets of Des Moines, Iowa, because no government agency is willing to prosecute their crimes.
Corporate criminals can successfully steal your retirement because your government leaders knowingly allow it to happen. While laws may be passed to protect investors, the reality is that fraud perpetrators use those same laws to steal. While ERISA was originally passed by Congress to protect you, that same law gives easy access to your funds by the criminals, mostly service providers who have no formal requirement to conform as fiduciaries to represent your best interest!
One case in point are proprietary investments. When the Act was passed, ERISA vehemently prohibited such forms of investments from entering the retirement savings investment stream. The obvious exposure is to fraud and corruption by service providers providing false investment information and engaging in conflicted 401(k) offerings by companies like Principal life Insurance Company. Yet, today the majority of Principal’s 401(k) plan offerings include such funds. The average investor loses thousands of dollars in net value holdings in their investment portfolio each year.
Imagine a business where the owner sells his own product offerings to himself for the accounts of his clientele. If you think it sounds complicated, it is. But if you clearly understand the concept, that is exactly what happens when you dump your hard earned money into Principal’s book of business. Principal owns the plan assets it purchases on your behalf. The variable annuity your employer agreed to when he or she hired Principal as a service provider clearly makes that statement. If the value of owned investments drop, Principal simply sells those same investments at inflated prices to it’s customers. If investments Principal purchased from themselves to the 401(k) accounts increase in value, those funds are moved back into the owned pool of investments by Principal and are replaced with losing investments.
Unknown to investors, the financial meltdown in 2008 was actually a “correction” made by service providers like Principal to protect other holdings they owned from default by developers to whom they had loaned funds. Those “troubled assets,” including the defaulted loans made by Principal, were “sold” off-market to 401(k) plans at grossly inflated prices, then devalued as unrealized losses. Following the devaluation process, those same investments could be repurchased at rock bottom prices by the financial institutions, resulting in realized losses for the investors. Meanwhile, the financial institutions enjoyed huge unrealized gains when those same properties were re-balanced in their book of owned investments.
Add to the fact that investments Principal purchased on your behalf are from a pool of offerings they themselves own is even more troubling. ERISA clearly prohibited such transactions when the law was originally written… yet one individual attorney working for the Department of Labor made a decision to allow Principal the freedom to commit such an atrocity on the investing public. This decision shocked even the investment community… they never conceived such a violation of ERISA would be permitted.
The DOL later agreed to Principal’s written request to withhold retained earnings from the 401(k) investments. Those earnings that represent income from the investment of YOUR plan assets… income that belongs to you… could now be retained in Principal Life Insurance Company’s own general account! The logic was that since those fund’s would be retained in Principal’s own general account, they would not technically be considered “plan assets” until Principal decided to move those funds into the separate account, in clear violation of state regulations. A sort of reverse logic by the DOL to accommodate Principal’s off balance sheet accounting methods.
In one year, when Principal finally decided to move those retained earnings into the separate account fund for commercial property investments, Principal reported eleven dollars in net value gain for all investors! This was the reported net income from billions of dollars worth of rental income property that generated hundreds of millions in revenues… you, the investor, received eleven dollars! Overall, losses such as these number in the trillions of dollars in lost revenues for the industry.
In another case involving the Securities and Exchange commission, Principal wanted to divest their owned interest in AIG investments at a time when AIG was reporting huge losses. AIG would eventually file Chapter Eleven if the government didn’t intervene. Principal wanted to “sell” those failed proprietary investments to 401(k) plans, but didn’t want the public to know these activities until the rollover was completed. On September 16, 2008, the U.S. Government took control of AIG’s assets. On September 26, 2008, Principal froze the Principal U.S. Property Separate Account to prevent investors from withdrawing or transferring their funds. On October 19, 2008, Principal filed an exemption letter request with the SEC, and the following acknowledgment was received from that agency:
After being heavily invested in AIG owned investments, Principal was able to privately, in off-market transactions, transfer that ownership to millions of investors, with the help of the Securities and Exchange Commission, avoiding disclosure to the public. This act clearly violates SEC, DOL, and IRS regulations, and demonstrates collusion between a governmental agency and Principal Financial; it should have resulted in a conviction by the U.S. Justice Department of all parties involved. But no action was taken by any agency.
When you invest in an insurance company owned separate account offering, you are risking your entire retirement savings on the ethical behavior of individuals like Mark Hanrahan. If a managing director employed by Principal Real Estate Investors will put a loaded pistol to the head of a stranger to buy illegal drugs, imagine what he will do to steal your savings…. make the right due diligence efforts to protect your future. Demand the same compliance from your fiduciary advisor that you would expect from your personal attorney. Do not be a victim of financial fraud… let your fiduciary understand that you will pursue restitution if he ignores the warning signs ….