I’ve been very slow attempting a 401k rollover from my last job, mostly due to laziness. I finally got around to initiating the transfer and since the rollover process is slow (it can take 6-8 weeks), I promptly forgot about it. Fast forward 4 months later when, annoyed things were taking so long, I gave Vanguard a call (my favorite mutual fund company). They said there was a problem with my old 401k’s asset manager, Principal, and that I should contact them to resolve the issue.
Of course, being lazy, I took my time doing that as well. Here’s what they told me regarding my allocation to their U.S. Property Separate Account (which also appeared on their website in the following form):
“Because of the current state of the real estate market, The Principal® has taken action to protect participants’ interests in the Principal U.S. Property Separate Account (“Separate Account”). We are implementing a pre-existing contractual limitation in your employer’s group annuity contract which will allow us to manage the Separate Account and satisfy withdrawal requests over time and fairly among all those who request a withdrawal.”
401k Rollovers Are Subject To Contract Terms
The reason my rollover request was rejected was that the U.S. Property Separate Account I had invested in had a contract clause allowing them to halt redemptions if it had reason to believe those redemptions would harm other shareholders. Since this fund holds real estate directly and not Real Estate Investment Trusts (REITS), it would be unable to meet redemption requests without liquidating valuable real estate at less-than-ideal prices, hurting remaining shareholders. While this situation attests to the stupidity of buying real estate on a large scale directly rather than via the public capital markets, the fact remains that I won’t be able to roll over my 401k until the restriction is lifted. Of course, some argue you shouldn’t rollover your 401k to begin with, but that’s another debate.
The moral of the story is that you don’t have complete control over the funds in your 401k, or any other account for that matter. Practically all funds have contract terms granting them the right to halt redemptions under certain situations. Certain types of mutual funds like broadly-diversified equity index funds mitigate this risk somewhat, since the fund advisor has broad leeway in deciding which securities to liquidate without unduly hurting other investors. The real estate fund ran into trouble because a.) real estate is a relatively illiquid asset class and b.) the fund didn’t keep sufficient cash reserves. Buyer beware.
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