Principal Financial Advisors, Inc. would like to make you aware of two important changes:

  • Sub-advisor change on the LDI Extended Duration Separate Account, sub-advised by Barrow Hanley
  • The decision by Principal Financial Advisors to re-direct new contributions formerly allocated to the U.S. Property Separate Account, sub-advised by Principal Real Estate Investors

Principal LDI Extended Duration Separate Account changes scheduled for May 2020

Principal Life Insurance Company (Principal Life) recently announced changes to the Principal LDI Extended Duration Separate Account.

What’s Changing

  • Effective May 31, 2020, the Separate Account will replace Barrow, Hanley, Mewhinney & Strauss LLC with Principal Global Investors as the Sub-Adviser.
  • As a result, the total investment expense for the Separate Account will decrease 9 bps on the effective date of the change. A change will occur between the amount of revenue displayed as the Revenue Retained by Investment Provider and the Revenue Sharing to Recordkeeper.

Strategy update

  • The current actively managed portfolio by Barrow Hanley reflects a more concentrated and higher allocation to coupon STRIPs.
  • The new strategy managed by Principal Global Investors will be an enhanced passive strategy. The enhanced passively managed STRIPs portfolio seeks to provide investment results that closely correspond, before expenses, to the performance of the Bloomberg Barclays US STRIPs 20+ Year Index (“Index”), through a passive investment approach known as “sampling” to track the Index and replicate the risk and return characteristics of this Index. Principal Global Investors optimizes the portfolio by quantitatively eliminating the securities with either the highest trading cost and/or the lowest liquidity profile, and then optimize the remaining securities to mimic closely the reference index. The resulting portfolio would be very similar to the duration, quality and yield profile of the Index.
  • The Principal LDI Extended Duration Separate Account will continue to invest in US Treasury STRIPs, both principal and coupon securities, to achieve the desired duration range of 25+ years. The Index and Morningstar Long Government investment category will remain consistent.

Next Steps

Principal Financial Advisors, Inc. approves of these changes. We believe that these changes give the portfolio a better opportunity to reliably track the performance of the benchmark index (before expenses) while also reducing liquidity and trading cost concerns. No action is needed by you. We just wanted you to know that as a co-fiduciary for the investment options used in your company’s retirement plan that Principal Financial Advisors has reviewed and approves of these changes.

Decision to re-direct new contributions formerly allocated to the Principal U.S. Property Separate Account

On Friday, March 20, 2020, Principal Life Insurance Company communicated to you and to Principal Financial Advisors the implementation of withdrawal limitations on the Principal U.S. Property Separate Account (Separate Account) sub-advised by Principal Real Estate Investors, LLC. The Separate Account invests primarily in owned commercial real estate, such as warehouses, office buildings, apartments and retail properties.

The global spread of COVID-19 has resulted in volatility in the public equities market. Many investors are now overweight to real estate given commercial real estate’s positive performance year-to-date. Due to this and other factors, investors have submitted an unusually high number of withdrawal requests in a concentrated period of time.

The Separate Account maintains sufficient cash to satisfy withdrawal requests in the ordinary course of business, but the concentration and dollar volume of withdrawal requests resulted in Principal Life Insurance Company’s decision to implement a withdrawal limitation for the Account to proactively protect the best interests of all contract holders. This limitation will be in place at least until adequate liquidity exists to meet withdrawal requests and maintain ongoing operations.

Withdrawal restrictions are common for institutional investors investing in open-ended private real estate accounts similar to the Separate Account. However, this is only the second time Principal Life has invoked a withdrawal restriction on the Separate Account.

Principal Financial Advisors believes strongly that real estate plays an important role in our asset allocation strategies. The performance record of Principal Real Estate Investors, LLC, has been exemplary throughout the life of the Separate Account. Accordingly, Principal Financial Advisors supports our clients’ continued investment in the Separate Account by maintaining existing balances in the investment. However, given the uncertainty of market behavior and its potential impact on the ongoing management of the Separate Account, Principal Financial Advisors believes it is prudent to re-direct new contributions formerly allocated to the Separate Account. As a result, effective April 9th, 2020, Principal Financial Advisors began re-directing new contributions formerly allocated to the Separate Account proportionately to the non-fixed income separate accounts used in your retirement plan’s asset allocation.

Questions?

If you have any questions about either of these changes, your plan or what is occurring in the markets please contact your advisory associate at Principal Financial Advisors, Inc.

Sincerely,

Randy Welch
President
Principal Financial Advisors, Inc.

Before directing retirement funds to a separate account, investors should carefully consider the investment objectives, risks, charges and expenses of the separate account as well as their individual risk tolerance, time horizon and goals. For additional information contact us at 800-547-7754 or by visiting principal.com.

 

Principal Financial Advisors, Inc. is a registered investment adviser and member of Principal Global Investors.   Principal Global Investors leads global asset management and is a member of the Principal Financial Group®.

 

Asset allocation strategies are developed using Separate Accounts available through a group annuity contract of Principal Life Insurance Company.  Asset allocation and diversification do not ensure a profit or protect against a loss.

 

Investing involves risk, including possible loss of principal.

 

Real Estate investment options are subject to investment and liquidity risk and other risks inherent in real estate such as those associated with general and local economic conditions. Property values can decline due to environmental and other reasons. In addition, fluctuation in interest rates can negatively impact the performance of real estate investment options.

 

Principal Life Insurance Company is the Investment Manager as defined by ERISA, with regard to the assets of the Separate Account. Fixed-income investment options (inclusive of U.S. Treasury Inflation-Protected Securities) are subject to interest rate risk, and their value will decline as interest rates rise. Neither the principal of the bond investment options nor their yields are guaranteed by the U.S. government or any other government entity.

Bloomberg Barclays U.S. Strips 20+ Year Index measures the monthly total return of the Barclays US STRIPS 5-10 Yr Index, where the STRIPS are derived from the Barclays US Treasury Index and have maturities of 20+ years.

 

Separate Accounts are available through a group annuity contract with Principal Life Insurance Co. Insurance products and plan administrative services provided through Principal Life Insurance Company, a member of the Principal Financial Group, Des Moines, Iowa 50392. See the group annuity contract for the full name of the Separate Account. Certain investment options and contract riders may not be available in all states or U.S. commonwealths. Principal Life Insurance Company reserves the right to defer payments or transfers from Principal Life Separate Accounts as permitted by the group annuity contracts providing access to the Separate Accounts or as required by applicable law. Such deferment will be based on factors that may include situations such as: unstable or disorderly financial markets; investment conditions which do not allow for orderly investment transactions; or investment, liquidity, and other risks inherent in real estate (such as those associated with general and local economic conditions). If you elect to allocate funds to a Separate Account, you may not be able to immediately withdraw them.

 

Certain investment options and contract riders may not be available in all states or U.S. commonwealths.

 

April 2020 – 1142373-042022

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