Principal Settles with Nutmeg State on Broker Commission Charges

November 14, 2007 ( - 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.

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.   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

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.