Another financial services provider has been sued, charged with self-dealing in its selection of a guaranteed investment contract (GIC).
On March 24, 2020, suit (Sweeney v. Nationwide Mutual Ins. Co., S.D. Ohio, No. 2:20-cv-01569, complaint 3/26/20) was filed by Ralph Edwards, Inger Bautista, and Robert Burcina, seeking class status, claiming the use of a guaranteed investment contract (GIC) issued by Nationwide Life Insurance Company (NLIC) for the Nationwide Savings Plan (a 401(k) plan) was a conflict of interest and a breach of ERISA fiduciary duties by the Benefits Investment Committee of the plan sponsor, Nationwide Mutual Insurance Company. It was the second such suit filed in a week in the Southern District of Ohio.
The plaintiffs here allege that, “for financial services employers like Nationwide, the potential for imprudent and disloyal conduct is especially high. Not only do the Plan’s fiduciaries lack a direct incentive to prudently vet investment options and maximize returns, Defendants can benefit the company by utilizing the Plan’s assets to further Nationwide’s financial interests instead of the interests of the Plan and its participants,” distinguishing those from a defined benefit plan where they claim those conflicts “are not present” since “the employer bears all risk of investment losses and pays all investment expenses.” That latter point emerges as significant later as they will contrast the difference in those two contracts as indicative of the fiduciary breach.
Plaintiffs claim that plan participants suffered $142MM in losses because the investment performance of the GIC for the 401(k) plan was less than the investment performance of another Nationwide Life Insurance Company annuity contract that had been selected for the Nationwide Retirement Plan (a defined benefit pension plan) by the same investment fiduciaries. Specifically, the suit alleges that “Defendants failed to negotiate contractual terms for the 401(k) Plan’s Guaranteed Investment Fund (“GIF”) comparable to the terms they negotiated on behalf of the Nationwide Retirement Plan (“the Pension Plan”), and as a result, the 401(k) Plan’s GIF paid a much lower interest rate than was paid by the otherwise-identical investment held within the Pension Plan. This failure to negotiate at arm’s length led to the Class losing over $142 million in benefits during the class period.”
While the suit claims that “fiduciaries of several other retirement plans sponsored by insurance companies that hold fixed-interest investments like the GIF in both their 401(k) and traditional pension plans—such as New York Life and Ameritas—were able to negotiate comparable contractual terms for both plans, resulting in interest rates for the 401(k) plan’s fixed investment that were roughly the same as, if not better than, the rates paid to their pension plans,” the plaintiffs here alluded to a “strong inference” that the “negotiation and subsequent tolerance of a lower crediting rate for the 401(k) Plan’s GIF, relative to the Pension Plan’s GIF, was influenced by the incentive to engage in self-dealing at the expense of employees’ retirement savings.”
However, the complaint does not acknowledge any of the differences in the contracts—terms, duration, size, purpose, limits, etc. The GIC investment for the 401(k) plan guarantees principal and the interest crediting rate for each calendar quarter. The annuity contract for the pension plan is somewhat unique in that investment performance of that contract determines the size, if any, of post-retirement benefit improvements for certain annuitants. Plaintiffs estimated damages by comparing the rates of return for the two contracts noting that both contracts are invested in the insurance company’s general account. The damages claim is based on the difference in investment performance between the two contracts.
This is only the most recent challenge to 401(k) plans that use proprietary investments. Here, plaintiffs claimed such investments are “… tainted by an inherent conflict of interest.” The complaint did not allege that the investment fiduciaries could have achieved a higher rate of return had they selected a GIC offered by a different insurance company or a stable value fund. Further, the plaintiffs did not allege that the Nationwide Life Insurance Company contract in the Nationwide Retirement Plan, selected by the same investment fiduciaries, was also a breach of ERISA fiduciary duties. Interestingly, plaintiffs claim damages based on the difference in investment returns between the two contracts.
There has been extensive litigation over proprietary investments—most recently, Invesco settled litigation on March 9, 2020 ($3.47MM). Other settlements include SEI ($6.8 million), MFS ($6.875 million), Eaton Vance ($3.45 million), Franklin Templeton ($4.3 million), BB&T ($24 million), Jackson National ($4.5 million), Deutsche Bank ($21.9 million), American Airlines Group Inc. ($22 million), Allianz SE ($12 million) and TIAA ($5 million). For comparison, others went to court and prevailed, such as: American Century and CenturyLink. Many others have been challenged over the use of proprietary funds, including but not limited to: MassMutual, Fidelity, Putnam, Citigroup, M&T Bank, New York Life, Neuberger Berman, Morgan Stanley, Bank of America, First Union, Regions Financial, First Horizon, Wells Fargo, Ameriprise Financial, U.S. Bank, American Century, Great West, Prudential, Sun Trust, and Reliance Trust.
It's not likely to be the last.
