401(k) funds putting locks on your cash
By The Wall Street Journal
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, 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 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,” Dursky said.
Limited options at a hard time
The withdrawal restrictions are limiting investment options for plan participants and employers at a key time in the markets. The timing is inconvenient for workers such as Dursky who are laid off and find their savings inaccessible.
Though 401(k) plans revolutionized the retirement savings landscape by putting investment decisions in the hands of individuals, the restrictions show that plan participants aren’t always in the driver’s seat.
Individual investors might not 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.
The aim is often to generate a small but relatively reliable return that can help offset fund expenses. But in recent months, many of the collateral investments have gone haywire, prompting money managers to restrict retirement plans’ withdrawals from the lending funds.
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.
Losses expected, but lockups?
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.
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. Principal doesn’t anticipate that it will make any distributions to investors who have requested redemptions until late 2009 or beyond, 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. 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 fund 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 Sterner, of Morton Grove, Ill.
BP goes to court
Retirement plans offered to employees of energy companylast fall tried to withdraw entirely from four 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 be sold only 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.
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, the company said.
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 balances, 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,” State Street spokeswoman Arlene Roberts said.