Principal’s Stable Value Product Called Out in Lawsuit – Rozo v. Principal Life

A lawsuit filed against Principal Financial concerning its traditional stable value product alleges that Principal serves as a plan fiduciary with respect to this product and violated its fiduciary duties by charging excessive fees. This case appears to have legs as it was recently certified as a class action on behalf of 41,000 investors.

Paperwork

Stable value products are unique to retirement plans. Principal’s product is fairly typical of the industry:

  • This investment is governed by a guaranteed investment contract (GIC) entered into between Principal and the plan.
  • Principal sets the interest rate quarterly. Its contract does not specify an interest rate. Unlike most GICs, there is no floor on the rate declared.
  • The assets are invested in Principal’s general account. It offers a guarantee of principal and past interest payments backed by its general account.
  • There is a spread between the investment income generated and the amount credited to plan participants. This fact is stated in Principal’s annual shareholder report filed with the SEC.   Principal does not reveal the amount of this spread.
  • There is a disclosed administrative fee associated with this product that ranges from 20 to 30 basis points.

The essence of the plaintiff’s argument is that the spread is an implicit fee charged to participants. Because Principal’s contract gives it the discretion to determine the crediting rate paid to participants, it is a plan fiduciary. Principal violated its fiduciary duties by setting its compensation and charging excessive fees. These facts present another issue. Whether the failure to disclose the spread violates ERISA’s fee disclosure rules under section 408(b)(2). Similar suits have been filed against Great West, Mutual of Omaha and MetLife.


ACR#255250 08/17