A class action suit filed July 11th charges Nationwide Life Insurance Company, Security Benefit Group and a national teachers’ union with overcharging union members for annuities and other retirement investments.
Attorneys filed the complaint on behalf of 2 members of the National Education Association, Washington, who had bought annuities from Nationwide, a division of Nationwide Mutual Insurance Co., Columbus, Ohio, and Security Benefit, Topeka, Kan.
The suit charges that the NEA breached its fiduciary duty as administrator of a 403(b) retirement plan by receiving millions of dollars of compensation from Nationwide and Security Benefit, violating a prohibition under the Employee Retirement Income Security Act against self-dealing by plan sponsors and fiduciaries.
In addition, the suit charged Nationwide and Security Benefit, which took over the NEA’s business from Nationwide in 2000, who were paid by investment firms for allowing their funds to appear on the menu of options offered to plan participants. That created conflicts of interest for both companies as plan administrators, the suit charged.
“Despite their fiduciary duties to plan participants, Nationwide and Security Benefit selected funds based on the payments they would receive rather than on an objective and prudent evaluation of the merits of the funds and the best interests of plan participants,” according to court papers filed by the plaintiff’s attorney.
NEA and NEA Member Benefits Corp., its benefits division, selected Security Benefit and Nationwide to be the “exclusively endorsed providers” of their 403(b) program in exchange for millions of dollars in endorsement fees, according to legal papers filed with the U.S. District Court in Tacoma, Wash.
In 2004, Supplemental Benefit won a 10-year renewal of an agreement with NEA that gives it the right to market supplemental retirement benefits to the union’s members.
The NEA, which claims 3 million members, negotiated its first supplemental retirement benefits agreement in 2000.
Security Benefit took over Nationwide’s NEA Valuebuilder annuity program for about $72 million that same year, covering 57,000 contracts with more than $860 million in assets.
The company sells benefits to teachers in the K-through-12 market, providing individual retirement accounts, 403(b) accounts and a deferred compensation plan.
Among other allegations, the suit charges NEA sought to create the idea among its members that it chose Nationwide and Security Benefit’s retirement plan because it was in the members’ best interests.
The NEA failed to investigate adequately the merits of the plan, the suit charges. In addition, it endorsed the plan exclusively in exchange for payments by the insurance companies, “notwithstanding the fact that the plan was substantially more expensive than comparable plans that were available in the marketplace,” according to the complaint.
Quoting the NEA’s Web site, attorneys said the union claimed that it “conducted an extensive review of numerous financial services companies to find the best provider for your NEA Valuebuilder Program, a company that understands the unique retirement needs of the education professional. Security Benefit Group of Companies is such a company.”
Elsewhere, the NEA Web site states, “For retirement planning assistance from a person you can trust, call for an appointment with a representative today.”
In fact, members who called the listed phone number talked to Security Benefit representatives who were earning commissions on the plan investments they sold, the complaint charges.
Nationwide and Security Benefits also received payments from mutual funds selected for the retirement plan, according to the complaint.
“These payments created impermissible conflicts of interest,” the complaint stated. “Nationwide and Security Benefit selected funds based on the payments they would receive rather than on an objective and prudent evaluation of the merits of the funds and the best interests of plan participants,” according to court papers.
One Security Benefit prospectus for its Valuebuilder variable annuity, filed May 1st, stated it paid a fee to NEAMBC of $510,000 each quarter.
The court papers also cite recent news accounts alleging the union collected nearly $50 million in royalties from Security Benefits in 2005 for the sales of financial products it endorsed to members.
At no time did the defendants disclose to members that the “NEAMBC’s endorsement of the plan was bought and paid for by Nationwide and Security Benefit,” according to the court papers.
The May 1st, 2006 prospectus for the NEA Valuebuilder VA states that costs assessed against retirement plan savings included an annual administrative fee of 0.15%, an annual mortality and expense fee of 0.90%, an annual contract fee of $30, and a withdrawal charge of 7%, decreased by 1% each year participants kept their retirement savings in the plan. In addition, the VA charged asset-management fees ranging from 0.78% to 2.57% for various funds within the plan.
Matthew D. Hutcheson, an independent ERISA fiduciary in Portland, Ore., comments that for retail 401(k)s, average annual fees typically total about 3%, including brokerage fees, expenses and peripheral costs.
In the 403(b) world, there may be other charges, such as bonus credit riders, typically 0.5%, or per-contract charges of perhaps $25.
“After a while, the fees can really add on to the costs,” Hutcheson notes.
Although he declined to venture an opinion on the NEA case, with which he was unfamiliar, Hutcheson did weigh in on the subject financial incentives for plan administrators.
“As a matter of principal, financial institutions should not purchase investment products for retirement plans on the basis of any financial incentives they receive,” he said. “The industry, whether it’s 401(k) or 403(b), really needs to look out for participant’s best interests.”
A spokesman for Nationwide declined to comment because the company had not yet seen a copy of the complaint, while a spokeswoman for Security Benefit said it was company policy not to comment on pending litigation.
Michel Cole, legal counsel for NEA, also declined to comment as a matter of policy.