From the May 2004 issue of Investment Advisor • Subscribe!

They're Up In Arms

There's a tussle in Louisiana between some independent insurance agents and ING

Fur is flying in Louisiana. Six independent insurance agents in the state are suing ING because they say the company is forcing them to sell a new ING 403(b)/457 variable annuity product called AFT Choice Plus that's been endorsed by the American Federation of Teachers (AFT) whether it's suitable for their clients or not. If they refuse to sell AFT Choice Plus, the agents say, ING has threatened to take away their clients.

In a lawsuit filed February 6 in U.S. District Court for the East District of Louisiana, the agents further claim that in September 2003, "the Southeast regional manager of ING came to New Orleans and met with a group of ING independent agents, and advised that plaintiffs would no longer be allowed to sell ING and/or Reliastar 403(b) plans if plaintiffs utilize the AFT endorsement to procure any business in the Orleans Parish School system." Reliastar is an ING company.

It's unclear whether the agents claim that ING told them they can no longer sell any ING/Reliastar products, or that they can't use the AFT endorsement to sell any 403(b) products. Kevin Tully, a partner with the law firm of Christovich & Kearney in New Orleans, who filed the suit on behalf of the independent agents, declined to clarify the charge.

Tully says the six agents "do not think changing their clients from a 403(b) plan that they [currently] have into anything else is advantageous. It's an issue of what's best for the annuity buyer. Some of the [agents] feel very strongly that the 403(b) plan that [their clients] have is a superior product" to the AFT Choice Plus 457 product.

The lawsuit further states that, to facilitate the success of ING's career agents in selling the AFT Choice Plus 457/403(b) variable annuity, ING "has revealed, and/or is planning to reveal and/or has threatened to reveal" the independent insurance agents' client information to its career agents, "with the express and intended purpose of wrongfully using confidential and proprietary information belonging individually to each plaintiff."

Phil Margolis, an ING spokesman, says that ING "believes the lawsuit and its specific allegations are baseless." Margolis says ING will be filing a response to the lawsuit, but he declined to provide details on the response, stating that ING "does not elaborate on matters that relate to pending litigation."

Margolis says that "[Independent] agents can continue to offer ING or non-ING products to educators. Contact or access to educators as a whole is not limited to, or controlled by, AFT." He added: "Our goal is to engage new participants with this [AFT-endorsed] product."

According to the lawsuit, ING Life Insurance and Annuity Company (ILIAC) and/or ING Financial Advisors "had two competing sales forces, the independent agents, who promoted and sold ING products to their customers, and ILIAC career agents who, heretofore, had little experience, if any, in promoting and/or selling any 403(b) annuities or insurance products to employees in the public school system, including the Orleans Parish School System."

Scott Dauenhauer, a financial planner with Meridian Wealth Management in Laguna Hills, California, whose firm specializes in 403(b)s and has many teachers as clients, says independent agents in Louisiana have been calling him and complaining about ING and the AFT Choice Plus product. Dauenhauer says that a long-time independent agent from Louisiana called him recently and said ING had threatened to take away the agent's clients.

The suit itself addresses that very issue. "On information and belief, plaintiffs aver that defendants have, in fact, already shared plaintiffs' proprietary client list with ILIAC career agents with the intended wrongful purpose of misappropriating plaintiffs' clients."

Moreover, the suit says the agents each "reasonably relied on defendants not to misuse his or her confidential client lists and that the damages plaintiffs have sustained and/or will sustain and/or will continue to sustain are a direct result of plaintiffs' reasonable reliance on defendants' promises and defendants' breach thereby. Defendants knew or should have known that plaintiffs would never have revealed their client base and promoted and sold defendants' products had plaintiffs known that defendants would misuse and/or misappropriate plaintiffs' respective confidential client lists for their own purposes."

Who "Owns" the Client, Anyway?

The issue of who "owns" a client and the client's information is a contentious and recurring one in the financial services industry. Even independent investment advisors worry that the firms they use to custody client assets will lure away those clients. Richard Ford, senior VP of marketing at PlanMember Securities Corp., a broker/dealer in Santa Barbara, California, that specializes in 403(b) plans, says it's not uncommon for large financial services firms to try to replace independent agents with a captive distribution force. The opposite scenario is also taking place, he says. Firms that have "always had captive reps are now trying to integrate independent distribution," Ford says. "With that comes conflict."

Indeed, Mark Tibergien, partner-in-charge of the Securities & Insurance Niche for Moss Adams LLP in Seattle (and an Investment Advisor columnist), argues that "If you're independent, there's no question that you own the client." He adds: "The whole premise of an independent contractor is that the clients are theirs." But if you're talking about distribution of an insurance-based product, he says, there may be some gray areas concerning "ownership" of the client, because "the insurance world tends to view things differently than the securities world."

School Daze

Planner Dauenhauer argues that every school district should "take on a fiduciary responsibility, and ensure there are good [retirement planning] products made available" to teachers. Alex Wohl, director of AFT's public affairs office in Washington, says that AFT "would not adopt a plan that it thought was unfair in any way" to its member teachers.

ING clearly believes that the AFT Choice Plus product is suitabile for teachers as well. The company began marketing AFT Choice Plus in early March in Hartford, Connecticut; Washington, D.C.; and New Orleans. Margolis says ING's goal is to roll out AFT Choice Plus nationally.

As part of that rollout, Margolis of ING says the company has "agreed only to reimburse AFT for actual expenses associated with the rollout of the program." These expenses, he says, "are capped at approximately $30,000 per year." Any reimbursements apply only to startup marketing costs, for items like travel arrangements for rollout meetings and marketing materials, he says. "The reimbursement arrangement is not related to how many people we enroll [in AFT Choice Plus], or to assets" in the program, Margolis says.

The AFT Choice Plus prospectus states that, in return for AFT's endorsement, ING "will provide a broad range of investment products and services to the members of the AFT." It further states that, to cover expenses incurred in promotion of the AFT program, ING "will reimburse AFT for direct out-of-pocket expenses anticipated not to exceed $75,000 for calendar years 2003 and 2004 combined, and $25,000 for each calendar year thereafter."

Margolis says the AFT endorsement "opens up doors to speak to more teachers. That's [ING's] focus, to gain new participants." He adds: "AFT members are under no obligation to participate in the AFT Choice program."

Moreover, Margolis says AFT Choice Plus "is open to all eligible school district employees, not just AFT members, in any districts that approve the product for distribution to their employees."

The Limitations of 457s

The lawsuit was filed by six agents--Donna M. Dorsey, Kathleen "BeBe" Labourdette, Lily C. Miller, Joseph W. Pitts, Carlos "Chuck" Sabadie, Jr., and Tasha Nicole Galan.

According to the suit, the independent agents say ING has already shared their "proprietary client list with ILIAC career agents with the intended wrongful purpose of misappropriating" their clients. AFT Choice Plus is offered as both a 403(b) and a 457. Margolis with ING says that "the product, and its pricing, are exactly the same whether the school district picks the 403(b) or 457." Moreover, he notes, it's the school district that decides whether teachers will be offered a 403(b) or a 457, not anyone else.

Typically, Dauenhauer says, "school districts don't offer more than a couple 457 plans, and many times they only offer one." But a single 457 plan can limit participants' freedom to transfer assets to another plan, he notes, since assets in a 457 can only be transferred to another 457.

Dan Otter, the founder of www.403bwise.com, an educational and advocacy Web site for teachers who is also an adjunct professor at American University in Washington, says most teachers are thoroughly confused by 403(b)s and 457s. "No one is telling them about these plans," he says. Teachers just became eligible to contribute to a 457 through EGTRRA, the 2001 tax act.

Dauenhauer says that he would almost always recommend a 403(b) over a 457, because 403(b)s are more flexible, allowing clients to "move their money to any other vendor [that offers a 403(b)], if [the policy] has a surrender period." But there are advantages to a 457 plan as well Before deciding which plan to use, the first question the advisor should ask the teacher is how long she plans on being at her job. With a 457, Dauenhauer says, if the teacher leaves her job, she can take withdrawals penalty free; the teacher has to be age 55 or older to get the same benefit from a 403(b).

Washington Bureau Chief Melanie Waddell can be reached at mwaddell@ia-mag.com.

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