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Why Bad PR Forced Principal Life to Settle Its Fiduciary Violations Lawsuit in Record Time

What happens when one of the nation’s largest financial services firms victimizes its own employees?  Simple. It produces one of the fastest financial settlements in court history.  

Principal has the scorpion’s nature

In the case of Krystal M. Anderson and All Others vs. Principal Life Insurance Company, a lawsuit filed in the United States District Court for the Southern District of Iowa (Civil Action No. 4:15-cv-00119-JAJ-HCA), a settlement was reached in a little over two months for a case that involved serious fiduciary violations about selling proprietary funds to employees in company benefit plans that were both too expensive and underperforming.

The case, filed on 04/17/2015, and settled on 06/30/2015, was “most likely the shortest court case ever filed against Principal,” according to Dennis Myhre.

And while this settlement admittedly is old news, it still contains a powerful message about why the case was quickly settled:

“For good reason: Principal could not afford to have the case endure scrutiny… the fewer of their clients that knew about it, the better.  A key element in this case is that the class of plaintiffs filing this case are all employed by Principal Financial Services, with insider information, and involved the Principal Select Savings Plan for Employees or the Principal Select Savings Plan for Individual Field.”

Myhre said the claims in the suit spanned from 2008 through 2015, and included allegations that Principal, the largest employer in Iowa, violated the federal Employee Retirement Income Security Act of 1974 (ERISA), “by failing to comply with their responsibilities under ERISA to the Plans and participants of the Plans in the management of the Plans.

“The Plaintiff claimed that the Defendants (Principal) acted improperly by selecting and maintaining proprietary Principal Life investment options in the Plans and charging excessive fees, paid to Principal Life, for the Plans’ administrative services. As a result, Plaintiff claims, participants of the Plans paid higher fees and obtained less return on their investment.”

As a former employee of Principal, and one who wrote about these proprietary funds for marketing purposes, many of us knew Principal’s funds were underperformers and that the choice of funds in Principal’s 401(k) plans were limited simply because they were managed by their in-house stable of nameless fund managers. Some of us also knew that Principal, like other insurance companies and most large banks that offer mutual funds, are not innovative in adopting new investment products (such as ETFs) and strategies.

As a result, a hint to individual investors is never to invest in mutual funds managed by insurance companies and banks.

So with this in mind, not only did Principal push underperforming funds on its own employees and the public, it also victimized shareholders by not doing anything innovative, such as launching ETF-based index funds that could have replicated asset allocations of many proprietary funds at lower costs. The reason they did not innovate using ETFs was that their entire investing business was based on a top heavy, expensive national mutual fund wholesaler distribution system that generated huge commissions for wholesalers, their internal assistants and the managers back in Des Moines who had nothing to do with money management, yet reaped the dollar benefits of free-riding on the backs of unsuspecting investors and their own employees who were paying too much in fees for too little in returns.

The image that Principal Life was the wholesome employer in Iowa who believed in treating all investors and employees alike was simply a lie. The lawsuit showed they were predators and that is why the lawsuit was settled in record time.

But as Myhre writes, the lawsuit could be a game changer since there will be more serious financial penalties for those who put their own interests ahead of their own customers by violating the fiduciary standard.

According to Myhre: “Principal will continue to rip off investors, using financial advisors to bid their dirty work, but you as that advisor, will assume the same role as plan sponsorsYOU will also owe a fiduciary duty to your clients.  If you are an advisor either employed by Principal, or working for them in dependently.  Those fat commissions you have enjoyed from Principal by promoting their proprietary funds, for example, with come with a very high risk of violating the new Conflict of Interest ruling recently approved by the Department of Labor.  Principal will continue to peddle their expensive proprietary products to the Plan Sponsors, and you will continue to hawk them to your clients for those high fees, but the risks will increase with the rewards!”

 

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Chuck Epstein

Chuck Epstein

Chuck Epstein has managed marketing communications and public relations departments for major global financial institutions and participated in the launch of industry-changing financial products. He also has written by-lined articles for over 50 publications, five books and served as editor and publisher of nation’s first newsletter on the topic of using the PC for personal investing and trading. (“Investing Online, 1994-1999). He also is a marketing consultant, writer and speaker on topics related to investor protection and opportunities in the very dynamic cannabis industry.

He has held senior-level marketing, PR and communications positions at the New York Futures Exchange, Chicago Mercantile Exchange, Lind-Waldock, Zacks Investment Research, Russell Investments and Principal Financial.

He has won national awards from the Mutual Fund Education Alliance (MFEA) and his web site, www.mutualfundreform.com, was named best small blog in 2009 by the Society of American Business Editors and Writers (SABEW).

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