401k's to Clients: No, You Can't Have Your Money

This post first appeared on Minyanville.


Remember all that money you socked away in your 401(k)? As financial markets continue to reel after 2 years of turmoil, pulling out your cash may be no easy task.

The Wall Street Journal reports certain 401(k) fund administrators are limiting and even blocking withdrawals, due to mounting losses and the illiquidity of underlying assets. The restrictions come at an inopportune time for investors, as job losses and general financial hardship are forcing many to tap retirement savings earlier than they'd hoped.

Investment funds tied to real estate are having more troubles than most.

The Principal US Property Separate Account -- a fund that invests in office buildings in other properties managed by Principal Financial Group (PFG) -- is restricting withdrawals. According to a company spokesman, selling assets into an illiquid market to generate cash for client requests would cause losses for all fund participants. And while investors claim they knew the fund was riskier than your standard diversified equity fund, few expected their principal to be tied up for an indeterminate period of time.

To complicate matters, certain plan administrators who invested in more traditional securities lent out portfolio holdings to other investors in exchange for collateral that was supposed to be safe and secure. They did this to earn a small profit to cover administrative fees, purportedly for the benefit of their clients. But when credit markets went haywire, collateral -- such as the Lehman Brothers debt some funds had received -- plummeted in value or became otherwise hard to trade.

Similarly, selling securities into a distressed market isn’t an attractive option for money managers billing themselves as stern guardians of their clients’ money. Even State Street (STT), one of the country’s most prudent banking operations, has limited client withdrawals in some of its securities-related funds.

As policy-makers cross their fingers that stimulus efforts will work their magic, the damage wrought by this unprecedented market dislocation is still migrating from Wall Street to Main Street. As Minyanville’s Kevin Depew wrote back in July of last year: “As the echoes of Wall Street's drunkenness trickle down to Main Street, the real impact of a consumer-led slowdown will begin to appear, and the vapidity of the 'all is well' chorus from bankers and brokers on The Street will be revealed.”

Thirty years of gluttony, in which our country (indeed, the world) feasted on cheap and easy credit, aren’t worked off in a mere 18 months of government-induced economic “recovery.” As time rumbles on, the smoke and mirrors that maintain our illusory financial strength will collapse, revealing the wreckage underneath.

Rather than fear this eventuality, we should rejoice in it. Hardship will be an arduous path to a truly stronger foundation.