Administration November 14, 2007

Principal Settles with Nutmeg State on Broker Commission Charges

November 14, 2007 (PLANSPONSOR.com) - The Principal Financial Group has come to terms with the state of Connecticut, in a deal that will put $4.4 million back in the pockets of some defined benefit plan sponsors.
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According to a  statement by Richard Blumenthal, Attorney General of the State of Connecticut, since at least 1998, in connection with certain Single Premium Group Annuity and Single Premium Guaranteed Immediate Annuity (SPGA) contracts, Principal has paid approximately $3.2 million in undisclosed compensation to a group of brokers, including BCG Terminal Funding Company, Brentwood Asset Advisors, LLC, Dietrich and Associates, Inc., Sharp Benefits, Inc. and USI Consulting Group.   A  press release from the Principal characterized the transactions as “regarding a limited number of expense reimbursement arrangements made with a few brokers who sold single premium group annuity policies.”

Settlement Terms

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The settlement calls for The Principal to establish a fund in the amount of $4.4 million to be paid to plan sponsors who purchased single premium group annuity policies from brokers who received these payments from The Principal from 1998 through January 2006. The Principal also agreed to pay a penalty of $600,000 to the state of Connecticut.

According to the Principal, the policies primarily fund terminating defined benefit plans, and those referenced in the settlement represent less than 5% of all single premium group annuity policies written by The Principal between 1998 and 2006.   The Connecticut AG’s office said that “These arrangements provided a select group of brokers – who collectively controlled a significant share of the market in the placement and sale of SPGA contracts – with compensation beyond specified disclosed “commissions” in connection with the sale, marketing or placement of SPGAs.”   The press release goes on to note that, “In Principal’s own words, the arrangements were “a means of adding some additional compensation without having to be completely up-front” with the pension plan sponsors about the compensation provided to brokers.

“Throughout the process, we have denied the assertions of the Attorney General and we continue to do so. These payments were legitimate and legal. We disclosed all costs, including all broker payments, to plan sponsors,” said Ron Danilson, senior vice president, Retirement and Investor Services, at The Principal, in a press release. “We believe that we won all business fairly and clients selected us because we provided the best value for them.”   “We have fully cooperated with the Attorney General at every stage of the investigation, and though we disagree with the allegations, we have now decided to settle this case to avoid the costs and distractions of litigation,” said Karen Shaff, executive vice president and general counsel, The Principal.

In its  press release , the Connecticut Attorney General's office noted that, "While certain brokers claimed to act for the benefit of the plan and to obtain the best product at the best price, their recommendations were often motivated by the additional, undisclosed compensation they received from Principal.   In some cases, the compensation exceeded the disclosed specified "commission" by more than 100 percent. The agreements provided additional compensation to the brokers without revealing higher commission costs to clients."   Those payments were called "Expense Reimbursement Agreements" (ERAs), "Marketing Agreements" or "Service Agreements."  

According to the Connecticut Attorney General, in letters to brokers in June 2000, Principal said that after careful evaluation of "the nature of the agreement," Principal decided to terminate ERAs and that, "since the ERA will no longer be used, the total amount of commission will be fully disclosed to the customer."   However, the Connecticut AG' statement claims that, "…under pressure from brokers unhappy with the elimination of ERAs, Principal agreed to develop new ways to funnel hidden compensation - in addition to the disclosed commissions - to numerous brokers," noting that the revamped broker compensation scheme was "disguised in various new ways - as "administrative and consulting" costs or "Marketing Agreements" and "Service Agreements."

Settlement Terms

Under the  settlement , Principal must, by early January 2008, identify customers eligible for restitution and calculate the amount each will receive from the SPGA restitution fund.  In the sale and placement of SPGAs to pension plans, the Connecticut Attorney General said that Principal has also agreed to:

  • impose a four-year ban on any broker compensation apart from the disclosed commissions for SPGA products and lines of business.
  • provide written disclosures to brokers and customers in its initial SPGA proposals - prior to binding - of all compensation and commissions paid to the broker, and receive written consent of each of its customers to such terms.
  • provide, by the end of the calendar year, written disclosure to pension plan customers of all compensation and commissions paid to or to be paid to the broker in relation to that customer's SPGA.
  • post a disclosure on its website - in a format to be approved by Blumenthal's office - of its compensation practices and policies.
  • implement written standards of conduct regarding compensation and commissions paid to brokers, and appropriate employee training.
Opinions November 13, 2007

IMHO: The On Your Own-ership Society

Last week, as I was surfing the Web, I stumbled across an article titled "Time for Employers to Cut Cord to 401(k) Plans."
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These days, I wouldn’t be surprised to see that kind of premise from a pro-business periodical (see ” IMHO: Why Knots “)—but the premise here was quite different.   The article’s author—Bloomberg’s John Wasik—wasn’t suggesting that employers should get out of the 401(k) plan business because it made good business sense for them, but rather that “employees can benefit from having 401(k)-style plans cleft from their employers because the programs would cease to be a black box of excessive middlemen and management expenses.”

“Control” Voice?

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The  article  points to the recent round of hearings on the issue in Congress, “several government reports,” and a recent survey by AARP as proof that employers are not fully disclosing and reducing fees in these retirement programs.   And thus, Wasik argues, “[G]iving you more control over your 401(k) will also give you the chance to find the best providers of the most diversified funds.”   Wasik maintains that, by allowing individuals to do their own shopping for the best deals, a “competitive national market” would emerge.   “Middlemen would get the boot and employees could improve their total returns,” he says.

Now, I’m a free-market libertarian from way back—and I’m leery of current trends that, IMHO, seem to disengage participants from the business of paying attention to these investment accounts.   But as I told Wasik in a follow-up e-mail, “No offense, John—but are you nuts?”  

I’ll concede that there are almost certainly situations out there where participants are being ill-served by the fees they are paying for their retirement plans, though I personally happen to think those situations are not as pervasive—or as egregious—as some would have us believe (it wouldn’t hurt to have more disclosure to be sure of that, however).   I will also concede that many (most?) participants don’t know what they are paying for their retirement programs—though I think that most could get to a good approximation of that number with a modest amount of help.

“Out” Takes

However, it seems to me that getting the employer “out” of the 401(k) would have several immediate—and hugely detrimental—impacts to participants.   First and foremost, our purported ability to find a better deal on our own notwithstanding (setting aside for a moment the reality that some significant number of participants don’t even want to take the time to fill out an enrollment form; see ” IMHO: For the People, By the People “), how am I going to be able to find a better deal with my individual 401(k) balance than my employer can with the aggregated balances of me and all my co-workers?   Even if some highly compensated workers managed to negotiate a special arrangement, do we really think that that the average participant could—or would?    

Second, once employers become mere conduits for payroll deductions, workplace education on such matters as the importance of saving and investment will become a thing of the past—after all, participants will now get that from the provider they found on their own.   Enrollment meetings?   No need for that, since your 401(k) is a do-it-yourself option.   And, IMHO, once we’re “on our own,” it won’t be long before that employer match will fade away (in Wasik’s defense, he doesn’t see the loss of the match as a consequence of his proposal—but I do).   The model for all the above, IMHO, can be found in much of the current non-ERISA 403(b) space: the match, the lack of employer involvement, the low participation rate(s), the fees….

But the thing we would lose most with an employer-lite 401(k), IMHO, is the oversight of a trusted fiduciary.   Granted, many employers don’t fully understand that role or the responsibility—too many don’t have the expertise, and far too many are willing to place those decisions in the hands of providers and advisers undeserving of that trust.  

But many more are working hard every day to see that these programs are well-administered, reasonable in price and service, funded and supported in the workplace—and in the process, making a difference in helping ensure a more satisfying retirement for us all.

IMHO, it’s a contribution our nation can’t afford to be without.

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