Last fall a law firm better known for its personal injury work -- St. Louisbased Schlichter, Bogard & Denton -- unnerved the retirement industry by filing 14 class-action lawsuits alleging that Boeing Co., Bechtel Corp. and other blue-chip corporations had permitted 401(k) providers to charge excessive fees. Now the plaintiffs' bar is widening its assault to include what may be much easier prey: the providers of 403(b) and 457 plans, public sector versions of the 401(k) that are offered to teachers, police officers and firemen and are often chock-full of pricey annuity offerings.
"In this second round of lawsuits, the insurance providers to government-sponsored defined contribution plans are far more vulnerable because of their relatively higher fees and lower transparency," says Gregory Ash, an attorney with Spencer Fane Britt & Browne, a law firm in Kansas City, Missouri, that is not involved in the cases but has considerable experience representing plan sponsors and providers.
One of the new cases was filed against ING Life Insurance and Annuity Co. in March in the U.S. District Court for the Southern District of New York by members of NYSUT, a New York State teachers' union. It was prompted by a $30 million settlement reached last October between former New York attorney general Eliot Spitzer, now the state's governor, and ING. In that agreement, ING acknowledged paying NYSUT $3 million a year that the union did not disclose to its members; Spitzer concluded that the money had largely served to ensure ING's access to the union membership.
In the district court case, the complaint not only repeats that charge, attacking NYSUT for its "exclusive endorsement" of ING, it also alleges that the financial services firm breached its fiduciary duty to union members by engaging in revenue-sharing kickbacks with mutual fund companies whose products were offered in the 403(b) plan. The suit is being pursued by Keller Rohrback, a Seattle law firm that has made successful ERISA claims against Enron Corp., WorldCom and Global Crossing.
"There is no dispute about what is happening here," says Keller Rohrback partner Lynn Sarko, referring to the money that changed hands. "It's only a question of whether it is permissible." His firm is investigating fees charged by ten other annuity providers, including American International Group and Prudential Retirement.
Two other class-action suits that should draw attention in the industry were filed in Ohio and Connecticut state courts in November and January, respectively, by Kevin Beary, the sheriff of Orange County, Florida. He is suing in his dual capacities as a participant and sponsor of a 457 plan -- and as a stand-in for sponsors and participants of similar plans across the country. Beary contends that ING and three subsidiaries of Nationwide Mutual Insurance Co. breached their fiduciary duty and unjustly enriched themselves by extracting revenue-sharing payments from firms whose products were in the plans they offered.
"I was concerned that the vendors were playing games with my employees' retirement money, and I did something about it," says Beary, who is represented by Stanley, Mandel & Iola, a Dallas law firm specializing in securities and insurance litigation.
Both ING and Nationwide deny wrongdoing and assert that the U.S. Securities Litigation Uniform Standards Act of 1998 preempts the state laws that the plaintiffs invoked and voids their claims. (A motion for dismissal is still pending.)
The class-action suits are just one of many recent developments putting pressure on retirement plan providers to cut fees. Representative George Miller, the California Democrat who chairs the House Education and Labor Committee, held hearings on 401(k) fees in March and will soon hold another round. In response to the hearings and lawsuits, "there are a lot of people looking for ways to address fee issues without drawing attention to themselves," says retirement-plan-fee consultant Stephen Lansing of Bogdahn Consulting in Winter Haven, Florida.
Many observers don't expect revenue-sharing to survive. That is welcome news to Daniel Otter, who runs 403bwise.com, a Web site that aims to demystify the retirement vehicle. "The abuses are so egregious in 403(b) plans," he asserts. "There's the potential for drastic improvement."