Ask Terry Questions Are Principle’s Separate Accounts a giant skimming operation?

Are Principle’s Separate Accounts a giant skimming operation?

By Terry Savage on January 26, 2024 |

Hello Terry – My employer uses Principal for its 401k plan, which is part of the Principle Life Insurance Company. The majority of investment options offered include the term “Separate Account” in the name, which means the investment is through a group annuity contract and is not a mutual fund with a ticker symbol, nor is it a publicly traded option. In addition, a Separate Account is considered an insurance product so it is exempt from being registered with the SEC, does not have to produce a prospectus, nor does it have to pay any dividends directly to each investor.

All of this was quite a surprise to learn about since 22 of the 27 equity investment options are of the Separate Account classification, with the remainder being investment funds with high expense ratios of 0.85% to 1.57%.

I chose the Large Cap S&P 500 Index Separate Account because it is the only index option and has a low fee of 0.06% compared to the other choices. I am familiar with index funds and initially thought this option would also pay out at least an annual dividend as the investment plan book clearly states that “Each index based investment option is invested in the stocks or bonds of the index it tracks.” I know many of the large cap stocks pay dividends as I see this in the S&P 500 index fund I hold in my Vanguard IRA.

When I have inquired with Principle about the dividends for this Separate Account I have been told these are reinvested back into the account to increase its unit value, but when I ask for the dates when the dividends were received in order to compare with the account’s unit price to see if an increase in value occurred, my request is not answered.

I have repeatedly asked Principal to be transparent about the dividends since they are not going to each investor in the form of cash or reinvestment. This has made me wonder if the dividends are being allocated as earnings directly to Principal’s bottom line and/or for a form of compensation to the Separate Account advisors?

Are you aware of anywhere else I could seek this information, such as an annual report that needs to be filed with an insurance commission? It’s beginning to seem like these Separate Accounts may be a giant skimming operation that is pocketing the profits earned from my money and risk, which would not be acting in the best interest of the plan and its participants.

Terry Says

You are way out over your skis — and have no idea what you’re talking about. So calm down!

The funds in your 440l(k) plan are “proprietary” funds created and managed by the insurance company. Yes, they likely have higher annual fees than funds offered by Vanguard or Fidelity, and you should feel free to complain to the HR department about that. There are literally dozens of employee lawsuits against employers for breach of fiduciary duty by choosing mutual funds that have high expenses inside their employee benefit plans.

Index funds DO NOT pay out dividends! They are automatically reinvested into the shares of the companies in the funds. You will never know how much of your total return is from reinvested dividends, but history suggests as much as 40% of long term returns on a large company index fund comes from dividends.

AND, it doesnt matter at all to you, because it’s all INSIDE your plan –where it continues to grow and compound. And when you take it out down the road, it will all be taxed as ordinary income.
Find something else to worry about!

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