Proprietary Funds… A License to Steal from 401k Investors

If you are a 401k investor, and have in your portfolio a Principal Target Date Separate Account fund, chances are the account includes in large part an investment in proprietary funds.  You may have no clue what a proprietary fund is, so you ask your plan provider or one of their sales persons.  Most likely you are asking the wrong person, and let me explain.  When you go to Walmart to buy groceries, Walmart will have their own brand on the shelf along with dozens of other brands.  Usually the Walmart brand is a little cheaper, which is an inducement to buy the proprietary brand.  And that would likely be a good choice, assuming the quality is comparable.

Suppose you needed to buy a fleet of vehicles for your business, so you hire a local Ford dealer to administer the task.  You authorize him to purchase these vehicles on your behalf.  He later Business Hand Clicking Compliance Button On Blurred Backgroundoffers you a “package” deal which includes a variety of well known new vehicles, but over one-half the vehicles are used Fords from his own inventory.  He bills you one price for the package, with no breakdown, and you have no idea what you have paid for each vehicle.  And since you authorized him to purchase the vehicles on your behalf, the deal is done… no questions asked.  You suddenly realize you just spent your hard earned money on an inventory of vehicles, many of which were owned by the dealer;  and since he was also the “buyer,” he could charge you any price he wanted for his used car inventory.  This scenario defines exactly what a Target Date Separate Account Fund represents.

When you purchase any one of a number of Lifetime Separate accounts from Principal, they will own over 60 different types of funds in their inventory.  At any time, one or all of these funds can become an investment in your Target Date Separate Account.  In Principal’s Lifetime 2030 A Fund alone, there were almost one-half billion shares available on 07-31-2015 with a total market value of almost 7 billion dollars.  As of November 30, 2014, over 50% of the investment dollars in the Principal LifeTime 2030 Separate Account were Principal owned funds, clearly an example of self dealing and prohibited transactions as defined by ERISA.  Since you have “authorized” Principal to purchase these investments on your behalf, as both Seller and Buyer they can load the price as they see fit, no questions asked.

 

Author: Dennis Myhre

Mr. Myhre can be contacted at..... dmyhre@fiduciaryfactor.com