Compliance

Guaranteed Investment Contracts Called Out In Principal Lawsuit

Participants in plans that purchased guaranteed investment contracts from the Principal say the arrangement has led to prohibited transactions under ERISA.

By John Manganaro editors@plansponsor.com | May 17, 2017
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Principal Life Insurance Company and Principal Financial Group are both named in a newly certified class action Employee Retirement Income Security Act (ERISA) lawsuit, filed in the U.S. District Court for the Southern District of Iowa.

At the heart of the complaint are guaranteed investment contracts (GICs), a type of group annuity contract sold to retirement plans. According to the complaint, Principal operates the Principal Fixed Income Guaranteed Option, also known as the Principal Fixed Income Option. Retirement plans in which the certified class are participants and beneficiaries invest in the Fixed Income Option pursuant to a GIC that governs the relationship between the plans and Principal.

Plaintiffs suggest the contract is inappropriately structured and has enabled Principal to “exercise its discretionary authority to retain unreasonably large and/or excessive profits rather than crediting the participants and beneficiaries of the plans with appropriate returns.”

The complaint suggests participants in plans that invested in the Fixed Income Option are “credited at an interest rate which Principal can set and change in its sole discretion. The rate is applied to all participants in all plans that invest in the Fixed Income Option.” The contract itself does not specify the rate, “nor does it promise that the rate will not go below a certain level. Nor does it promise that the rate will remain in effect throughout the life of the contract.”

“Throughout the relevant time period, Principal invested the assets it received pursuant to the contract as it chose, and retained for itself the difference between the investment earnings of those assets and the interest it chose to credit to the plans, otherwise known as the spread,” plaintiffs argue. “As stated in a Principal Annual Meeting 10K Report, ‘assets invested in GICs and funding agreements generate a spread between the investment income earned by us and the amount credited to the customer.’ Even while its earnings on the money paid by the plans were in the hundreds of millions of dollars, Principal reduced the amount credited to the Plans and their participants.”

Plaintiffs say Principal also “retained the spread in addition to an already high disclosed fee for providing administrative and/or recordkeeping services to plans. In other words, the contract allowed Principal to set its own compensation as a service provider to the plans, and to collect unreasonable and/or excessive fees from participants.”

Given this situation, ERISA breaches are alleged along the lines that “the contract is a plan asset of the plans holding it. Because Principal exercised discretionary authority over the administration of the contract, including setting the credited rate, it owed fiduciary duties to plan participants with respect to the contract.” Thus, according to plaintiffs, Principal breached its fiduciary duties “by unilaterally setting its own compensation and by charging unreasonable and excessive fees incident to administering the contract.”

As a result of Principal’s actions, plaintiffs argue the plans’ assets were “diminished,” and they seek “damages and equitable relief on behalf of the class.”

NEXT: Digging into the complaint

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