*****401(k)s Hit by Withdrawal Freezes*****

The Wall Street Journal reports that 401(k)s Hit by Withdrawal Freezes.

(emphasis mine) [my comment]

MAY 5, 2009
401(k)s Hit by Withdrawal Freezes
Investors Cry Foul as Some Funds Close Exits; Perils of Distressed Markets

Some investors in 401(k) retirement funds who are moving to grab their money are finding they can't.

Even with recent gains in stocks such as Monday's, the months of market turmoil have delivered a blow to some 401(k) participants:
freezing their investments in certain plans. In some cases, individual investors can't withdraw money from certain retirement-plan options. In other cases, employers are having trouble getting rid of risky investments in 401(k) plans.

When Ed Dursky was laid off from his job at a manufacturing company in March,
he couldn't withdraw $40,000 from his 401(k) retirement account invested in the Principal U.S. Property Separate Account.

That fund, which invests directly in office buildings and other properties, had stopped allowing most investors to make withdrawals last fall as many of its holdings became hard to sell.

Now Mr. Dursky, of Ottumwa, Iowa, is looking for work and losing patience.
All he wants, he said, is his money.

"I hate to be whiny, but it is my money," Mr. Dursky said.

The withdrawal restrictions are limiting investment options for plan participants and employers at a key time in the markets.
The timing is inconvenient for the number of workers like Mr. Dursky who are laid off and find their savings inaccessible. [More than "inconvenient", considering the imminent collapse of the dollar. By the time workers can access their savings again, they will have lost all value.]

Though 401(k) plans revolutionized the retirement-savings landscape
[financial sector] by putting investment decisions in the hands of individuals [profit hungry financial institutions], the restrictions show that plan participants aren't always in the driver's seat.

Individual investors mightn't even be aware of some behind-the-scenes maneuvers causing liquidity problems in their retirement plans. Many funds offered in 401(k) plans lend their portfolio holdings to other investors, receiving in exchange collateral that they invest in normally safe, liquid holdings. [Key point]

The aim is often to generate a small but relatively reliable
[insanely risky] return that can help offset fund expenses [ie: big bonuses for those gabling away America's retirement savings]. But in recent months, many of the collateral investments have gone haywire [AAA subprime CDOs squared aren't worth anything? Who knew (heavy sarcasm)], prompting money managers to restrict retirement plans' withdrawals from the lending funds. [Overleveraged hedge funds which borrowed stocks have gone bankrupt and the AAA/toxic collateral they provided is worthless. There is no money, so "money managers" are restricting withdrawals and hoping subprime borrowers start making their mortgage payments again.]

Some stable-value funds also are blocking the exits. These funds, available only in tax-deferred savings plans such as 401(k)s, typically invest in bonds and use bank or insurance-company contracts to help smooth returns. But in cases of employer bankruptcy and other events that can cause withdrawals,
these funds can lock up investor money for months at a time.

Investors in the Principal U.S. Property Separate Account said they understood the risk of losses, but didn't think their money could be locked up for months or years.
Most participants in the 15,000 plans holding the fund haven't been able to make any withdrawals or transfers since late September.

"To sell property at inappropriately low prices in order to generate cash for a few would hurt the majority of investors and violate our fiduciary obligations," said Terri Hale, spokeswoman for Principal Financial Group Inc., the parent of the fund's manager. The fund, which had $4.3 billion in net assets at the end of April, still is making distributions for death, disability, hardship and retirement at normal retirement age.

As of April 28,
redemption requests that had yet to be honored totaled nearly $1.1 billion, or roughly 26% of the fund's net assets [That is a lot of money]. Principal doesn't anticipate that it will make any distributions to investors who have requested redemptions until late 2009 or beyond [Dollar won't be worth anything by then...], Ms. Hale said. Meanwhile, the fund continues to fall, declining 25% in the 12 months ending April 30.

Some investors have lost hope of recovering their money
[because it is gone, thanks to "money managers" (ie: those who "manage" to make your "money" disappear)]. Judith Sterner, a 69-year-old part-time nurse, had more than $12,000 in the fund when she tried to transfer that balance to a money market last fall. But her transfer was denied, and her stake has since declined to less than $10,000.

"This $12,000 represents a year of my retirement money that I don't have," said Ms. Sterner, of Morton Grove, Ill.

Principal still allows new investors into the fund [they need this money to continue paying those "money managers"]. It categorizes the U.S. Property account as a fixed-income investment, alongside much stodgier funds holding high-quality bonds. New investors are warned of potential withdrawal delays, Ms. Hale said. As for the fixed-income categorization, she said, "a substantial portion of the account return is based on income streams from rents, and its returns have been comparable to fixed-income funds."

While the problems selling real-estate investments are relatively straightforward,
withdrawal restrictions related to securities lending stem from far more obscure practices [ie: the wonders of securities lending].

Funds often lend out portfolio holdings, through a lending agent, to other investors. These borrowers give the lender collateral, often amounting to about 102% of the value of the securities borrowed. Some of the collateral pools in which funds invest this collateral held Lehman Brothers Holdings Inc. debt and other investments that plummeted in value or became hard [impossible] to trade in the credit crunch.

Though agents who coordinate funds' lending programs share in profits from securities lending
[notice how every level of the financial system profited enormously by taking risk with the savings of others], the risk of such collateral-pool losses falls entirely on the funds that have lent the securities and, ultimately, retirement plans and other investors holding those funds.

The problems have limited retirement plans' ability to get out of securities-lending programs [if the entity which borrowed securities went under, these lent securities will never be returned], though participants' withdrawals generally haven't [yet] been affected.

Retirement plans offered to employees of energy company BP PLC last fall tried to withdraw entirely from four Northern Trust Corp. index funds engaged in securities lending.
Certain holdings in Northern's collateral pools had defaulted, been marked down, or become so illiquid that they could only be sold at low values, according to a BP complaint filed in a lawsuit against Northern Trust.

The BP plans halted new participant investments in the funds and
asked to withdraw their cash so it could be reinvested in funds that don't lend out securities [BTW. Securities lending is the counterpart to short selling. On e can't exist without the other].

But under restrictions imposed by Northern Trust in September, investors wishing to withdraw entirely from securities-lending activities would have to take their share of both liquid assets and illiquid collateral-pool holdings, according to a Northern Trust court filing. BP rejected that option, and the companies still are trying to resolve the matter in court.

Northern Trust's collateral pools are "conservatively managed" and focus on liquidity over yield [How can they say that with a straight face?], the company said.

State Street Corp. in March notified investors of new withdrawal restrictions in its securities-lending funds. Until at least the end of the year, plans can make monthly withdrawals of only 2% to 4% of their account balance, the notice said.

Plans wishing to withdraw entirely from lending funds will have to take a slice of beaten-down collateral-pool holdings.

"Given the current state of the fixed-income market, we felt it was prudent to put some well-defined withdrawal parameters in place," said State Street spokeswoman Arlene Roberts.

My reaction: 401k funds are blocking cash withdrawals.

1) Some investors can't access the money in their 401k accounts because their investments in certain plans has been frozen.

2) Most funds offered in 401(k) plans lend their portfolio holdings to other investors, receiving in exchange collateral that they invest in toxic/worthless assets rated as AAA.

3) As expected, the toxic/worthless collateral pools have defaulted, been marked down, or become so illiquid that they could only be sold for pennies on the dollar.

Conclusion: It would be a VERY good idea to get out of your 401k. Securities lending has been a near universal practice, which means virtually no 401k retirement fund is safe from withdrawal freezes.

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8 Responses to *****401(k)s Hit by Withdrawal Freezes*****

  1. Anonymous says:

    lock and loaded MF. Touch my money and fuck with my life, and I fuck with yours. Pass that on for me.

  2. dashxdr says:

    Speaking of 401K's, my story went like this:

    A company I worked at until 2001 offered matching funds, so I participated in their 401K program. When I left that company, I rolled the 401K into an IRA and I managed the investments.

    The value got as high as $28,000 or so. Then 2008 it crashed, along with most everything else. It got to around $6,000, and I thought what a great time to get out of the 401K. So I requested the 401K equities be moved into my regular brokerage account. This becomes taxable income ($6,000, whoopie, but a lot less than $28,000). And I'm liable for a 10% penalty, or around $600.

    Great time to exit 401K's. I got paranoid when I heard about Argentina seizing control of the people's retirement accounts. It's only a matter of time before the US government tries that, now that Social Security is bankrupt and only holds a bunch of IOU's from the US government.

    Yep, good idea to get out of these retirement accounts. The US government is not going to exist much longer anyway.

  3. Numonic says:

    Anyone that plans on retiring in the near future(i.e next 3 to 5 years) really needs to be stacking up on gold and silver now because at least those that are young and can still work for another 20 to 30 years can continue working and retire at an earlier age than their parents(who were getting paid in paper currency instead of physical gold/silver). The elderly who don't have any physical silver/gold now and plan on retiring in the next 3 to 5 years will have to wait a while unless they have siblings or someone willing to take care of them. But the next generation will retire earlier than the previous retiring generation as the next generation will be getting paid in gold and silver which will be appreciating more than the paper currency the generation before them recieved. If you factor in that the next generation will have to take care of the previous retiring generation and say that that may hinder the retiring of the next generation, i'm sure that the value of gold and silver will go up enough to take care of the past and future generation. That's why i say we are headed for a prosperous future.

    Had this in another of Eric's blogs but I figure it fits well in here too.

  4. Anonymous says:

    What the heck is the alternative to equities? Physical gold?? Thats crazy, but unfortunately it's completely plausible. This whole phoney system is about to go insolvent and the only thing left WILL BE physical gold (on your person).

    I had no idea that they could lend out my securities un-beknownst to me. This fractional reserve system sucks. It is bonefide fraud, legal and dispicable.

    I agree with the first poster, that it may be time to "water the tree of liberty" with the blood of some of these disgusting tyrants.

  5. Couple years ago i argues with my father about his reluctance to open RRSP (Canadian alternative to 401k) now i kinda see why he still doesn't have any money in them. Even if tax benefit is great the risk of locked money is even greater.

  6. OperationNorthwoods says:


    It's the nature of any government or economic system: the people in power will eventually try to steal everything. So, in a sense, the crazy thing is not having physical gold.

  7. Jeff Nielson says:

    Great post, Eric. I was completely unaware of this "withdrawals" issue. I fully agree with most of the previous comments.

    Even before recent events, U.S. "baby-boomers" were needing to flog TRILLIONS of dollars of their assets to support an equivalent standard of living to their pre-retirement.

    This liquidity issue will inevitably speed-up that 'fire sale', adding ANOTHER powerful downward driver to the U.S. real estate market (for MANY years to come).

    For those seeing the wisdom of dramatically shifting assets into precious metals, the time to do it is RIGHT NOW.

    The USD will crash as soon as the bond-bubble bursts (which may have already happened), so in addition to asset-prices heading steadily lower in the U.S., the PROCEEDS from those sales will have MUCH less purchasing-power.

  8. Anonymous says:

    Don't call Principal's investment call center and expect information.

    They read from a script.

    The company's team of idiots and legal buffoons administering the 401K plans don't have a clue.

    Good luck to employees who thought they managed their 401K plans

    and congratulations to all the money managers who made bonuses risking our retirement funds.

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