After 13 years, Haddock v. Nationwide settles for $140,000,000

On Friday December 12, 2014, the parties in Haddock v. Nationwide filed a motion for the court to approve a settlement worth $140,000,000. Originally filed in 2001, the lawsuit concerned the plaintiffs’ allegation that Nationwide received undisclosed revenue sharing payments from non-proprietary mutual funds in violation of ERISA.

The procedural history is extensive with 6 published orders from the court and multiple trips to the 2nd Circuit Court of Appeals. A more thorough background of the case is included in the motion seeking settlement.

As noted above, the $140,000,000 is split between two different certified classes, with $110,000,000 for one and $30,000,000 for the other. The plaintiffs’ will seek up to 35% of the settlement amount in attorney’s fees or $49,000,000 and up to $2,000,000 in costs.

The settlement also calls for extensive non-monetary relief:

Defendants will supplement the disclosures for its new group variable annuity customer proposals, its new group variable annuity contracts, and its plan sponsor website that relate to Mutual Fund-related fees and expenses in connection with group variable annuity products. Defendants will also add language in new customer proposals or plan sponsor website(s) informing trustees of Plans holding group variable annuity contracts of the opportunity to be transferred to a product where Mutual Fund Payments are credited to the Plan in the form of reduced asset fees in an amount equivalent to the disclosed reimbursement rate received for each Mutual Fund investment option.

Defendants will also supplement the disclosures for its new individual variable annuity customer proposals and its new product prospectuses that relate to Mutual Fund-related fees and expenses in connection with individual variable  annuity products with specific language in these disclosures that Nationwide shall provide, upon Plan Trustees’ written request, its best estimate of plan-specific, aggregate data regarding the Mutual Fund Payments received in connection with the Plan’s investments for the previous calendar year.

Defendants will also supplement the disclosures for its trust customer proposals, new trust, custodial, services or program agreements, and plan sponsor website that relate to Mutual Fund-related fees and expenses in connection with trust products. Defendants will also add language to the new customer proposals; trust, custodial, service or program agreements; or plan sponsor website(s) informing trustees of Plans holding group variable annuity contracts of the opportunity to be transferred to a product where Mutual Fund Payments are credited to the Plan in the form of reduced asset fees in an amount equivalent to the disclosed reimbursement rate received for each Mutual Fund investment option.

Defendants will enhance the procedures for certain future changes to the Product Menus in connection with Annuity Contracts and the Program Menus for the Trust Platforms as follows:

For group variable annuity products and Trust Platforms, Defendants will specifically identify to Plan Trustees, via mail, electronic delivery, or Defendants’ plan sponsor website, any addition of a Mutual Fund investment option to a Product Menu or Program Menu at the time of the addition. Defendants will update the new customer proposals; trust, custodial, service or program agreements; or plan sponsor website(s), as applicable, to inform Plan trustees that such Product and Program Menu additions are identified on the plan sponsor websites.

For group variable annuity products and Trust Platforms, Defendants will provide to Plan trustees written notice of any removal or substitution of a Mutual Fund investment option from the Product and Program Menus that is initiated solely by Defendants, and will not remove or substitute that fund from the Product or Program Menu for a particular Plan until it has received affirmative consent from that Plan’s trustee(s). Such notice shall be provided via mail, electronic delivery, or published on the plan sponsor websites at least thirty (30) days prior to the removal or substitution of a Mutual Fund investment option, and shall state the effective date of such removal or substitution. Defendants will update their new customer proposals; trust, custodial, service or program agreements; or plan sponsor website(s), as applicable, to inform Plan trustees that such removals or substitutions from the Product and Program Menus are identified on the plan sponsor websites.

For group variable annuity products and Trust Platforms, Defendants generally will not substitute one fund for another or otherwise unilaterally remove or substitute a fund from a Plan Menu. Defendants will confirm this change in their business practices by modifying their contracts  and Trust Platforms to eliminate any authority to unilaterally remove or substitute a fund from a Menu (the group variable annuity modifications will be subject to State insurance department approval).

For group variable annuity products, in those circumstances where a substitution or removal is necessitated by the actions of Mutual Funds (such as decisions by Mutual Funds or corresponding separate accounts to liquidate a fund, merge funds, change investment advisers or sub-advisers, or make other changes that prevent Nationwide Life from offering an investment option on the Plan Menu, or otherwise require Nationwide Life to change the Plan Menu), where administratively feasible, Nationwide Life will provide sixty (60) days written notice to the trustee of each Plan affected by the change via notice sent by first class mail, fax, or email. The notice will: (1) explain the proposed modification to the Plan Menu; (2) fully disclose any resulting changes in the Mutual Fund Payment rate received by Nationwide; (3) identify the effective date of the change; (4) explain the Plan trustee’s right to terminate the Annuity Contract; and (5) reiterate that, pursuant to the contract provisions agreed to by the Plan trustee, failure to object or otherwise respond shall be deemed to be consent to the proposed change. Nationwide Life will confirm this change in their business practice by modifying their existing and future Annuity Contracts to reflect this notice process (the Annuity Contract modifications will be subject to State insurance department approval).

For Trust Platforms, NFS has enhanced its notification procedures in those circumstances where a substitution or removal is necessitated by the actions of Mutual Funds (such as decisions by Mutual Funds or corresponding separate accounts to liquidate a fund, merge funds, change investment advisers or sub-advisers, make other changes that prevent NFS from offering an investment option on the Plan Menu, or otherwise require NFS to change the Plan Menu). These notification enhancements are substantially the same as the proposed enhancements to the group variable annuity products’ notification procedures.

For Individual Variable Annuities, Nationwide Life agrees to follow applicable U.S. Securities and Exchange Commission regulations, including notice requirements, with regard to the addition, substitution or removal of any investment option.

As part of the Settlement, current and future group variable annuity contract holders and those holding trust, custodial, services or program agreements, shall be offered the opportunity to be transferred to a product or Trust Platform where Mutual Fund Payments are credited to the Plan in the form of reduced asset fees in an amount equivalent to the disclosed reimbursement rate received for each Mutual Fund investment option. Defendants agree that they will continue to make available at least one Trust Platform offering for which Mutual Fund Payments are passed through in their entirety and/or the Mutual Fund Payment amounts are disclosed, subject to the restrictions on Defendants’ ability to substitute one fund for another as set forth in the Stipulation.

Defendants shall begin to implement these changes within six (6) months of the Settlement Effective Date, and will make diligent and good faith efforts to ensure that the implementation of these changes is concluded within twelve (12) months of the Settlement Effective Date, unless there is a change in applicable law or regulatory policy that renders any change or practice unlawful or impracticable or imposes different disclosure or other substantive requirements.

Our Thoughts

Needless to say, this is the most substantial settlement ever in an ERISA fiduciary breach case involving the receipt of revenue sharing by a service provider. It is unclear from the settlement how much of the conduct at issue in the lawsuit is still being done by Nationwide. Nonetheless, this settlement is nearly 10 times greater than recent settlements against ING (see ING Settles ERISA Class Action Lawsuit Over Revenue Sharing Practices) and MassMutual (see MassMutual Settles Excessive Fee Lawsuit).

 

Excessive Fee Case Against Lockheed Martin Goes to Trial – UPDATED

[UPDATE – On Sunday, the court entered an order entertaining a joint motion by the parties to delay the start of the trial until Tuesday. The parties filed such a motion stating “Plaintiffs and Defendants hereby jointly request a one-day continuance so that the parties can determine whether the case can be resolved short of a full trial. ” We will continue to monitor.]

On Monday, December 15, 2014, the excessive fee lawsuit against Lockheed Martin goes to trial in the Southern District of Illinois after 8 years since the case was filed, two trips to the 7th Circuit and one failed cert petition to the Supreme Court. It is the third such fee lawsuit to go to trial against employer fiduciaries since a “blitzkrieg” of lawsuits was filed against Fortune 500 companies on September 11, 2006. The previous trials were against Edison International and ABB, Inc.  and those cases have been covered extensively on this blog, as has the case against Lockheed Martin. See Victory for Plaintiffs: 7th Circuit Allows Class Certifications for Excessive Fee Cases and Supreme Court Declines to Hear Lockheed Martin Class Cert Appeal.

The three primary issues to be decided at trial concern the payment of excessive administrative fees, the stable value fund, and the company stock fund. Here are the final trial briefs as filed by the parties:

We will be monitoring the trial and will report on any major developments.

Benchmarking – All About that Fee

Stealing a tag line from the new hit song “All About That Bass” this blog post outlines a practical approach to benchmarking fees in a manner that complies with ERISA 408(b)(2) fee disclosure. As you may recall, ERISA 408(b)(2) is designed to provide a responsible plan fiduciary (“RPF”) with sufficient information to determine if fees are reasonable and conflicts are avoided.

In general, the information a covered service provider (“CSP”) is obligated to provide a RPF includes their fiduciary status, a description of their services, and the fees charged for those services. This information provides the foundation for preparing a quantitative fee benchmarking assessment. Once this information is in hand, it can be loaded into a benchmarking database to run a comparative assessment. Databases with information on many different plans are better than ones that represent a single service provider platform.

For the results to be reliable, the plan must be benchmarked against other plans that are similar in size by plan assets and participant count. The more similar, the more accurate the benchmarking results. It is also best practices for a quantitative assessment to be accompanied by a subjective qualitative analysis from the perspective of the RPF. Complex plans with size advantages may be better off using benchmarking combined with a formal request for proposal (“RFP”) process to validate fee reasonableness.

The depth of your benchmarking report will impact your ability to draw reasonable conclusions about fee reasonableness. Failure to comprehensively consider services rendered, who pays for those services, and how those services are paid are all material elements of sound benchmarking. Taking short cuts in the collection and evaluation of pertinent data, subjects benchmarking results to criticism the process was imprudent. In short, this is one process that cannot be taken lightly.

However, implementing a proper process with appropriate documentation to support fiduciary procedural prudence protects both the plan sponsor and the CSP by preventing a plan from paying unreasonable fees and protecting a CSP from receiving less than reasonable fees for services rendered.

If you would like further information on how to ensure a retirement plan is paying reasonable fees or how to benchmark a plan’s fees, call or email me at 704-699-7031 or jwitz@fraplantools.com.

Supreme Court Declines to Hear Appeal of Tussey v. ABB

Yesterday, November 10, 2014, the Supreme Court published an order declining to hear the appeal of the 8th Circuit decision in Tussey v. ABB from earlier this year. (see Tussey v. ABB Affirmed, Reversed, and Vacated in Part by 8th Circuit).

The Supreme Court does not provide a reason why they decline to hear appeals. However in this instance, there are at least a few speculative guesses. First, they have already agreed to hear two ERISA cases this term, with one being Tibble v. Edison and the other a retiree health care vesting case that had oral arguments recently. Second, on the issue of deference which was the heart of plaintiffs’ appeal, the district court will get to decide that issue for the first time. How the district court will decide could make the Supreme Court hearing the case unnecessary. The Supreme Court generally dislikes hearing cases that have an opportunity to work themselves out in the lower courts.

So what’s next? The case will now go back to the district court for it to decide the outstanding issue of deference and any lingering issues regarding attorney’s fees. I can guarantee one thing…this is not the last time we will hear about Tussey v. ABB.

Settlement Provides Guidance on Fiduciary Governance

Once the parties in complex litigation agree on the terms of a settlement, it is not common for a court to reject the settlement unless there is some profound error or injustice. As the the recent settlement in Goldenstar Inc. v. MassMutual Life Insurance Co. (see MassMutual Settles Excessive Fee Lawsuit) is very similar to past ERISA settlements including the recent one against ING (see ING Settles ERISA Class Action Lawsuit Over Revenue Sharing Practices) we anticipate the settlement will be approved. While a settlement holds no weight beyond the signatory parties, and here the class represented by the named plaintiffs, the terms of a settlement can be highly instructive to observers.

As such, a fiduciary should view this settlement as an opportunity to adjust internal policies, processes and procedures of their fiduciary governance as the issues raised in this case could affect how fiduciaries and service providers interact. For example, at the next fiduciary committee meeting or before signing a service agreement with any covered service provider (“CSP”), the following questions should be considered by the responsible plan fiduciary(ies)?

  1. Has the CSP provided us a list of all available investment options?
  2. Does our CSP provide a notice of any additions and deletion from the menu of options?
  3. Does any CSP have the discretion to remove an investment from the menu without the prior authorization of the responsible plan fiduciary?
  4. Has your CSP agreed not to delete, change or replace your investment options without providing the responsible fiduciary with 60 days advanced notice and their affirmative agreement to the change?
  5. Has the CSP agreed to provide the responsible plan fiduciary with a disclosure that identifies the operating expense ratios for each investment alternative along with the revenue paid (revenue sharing) by the investment alternative to any CSP other than for investment management services?
  6. Does the responsible plan fiduciary have the option to pay all plan fees except the operating expense ratio for investment management services directly from the corporate account versus deducting the fees from indirect fees passed to the CSP from the investment alternatives as revenue sharing?
  7. Does the responsible plan fiduciary have the option of using investment alternatives that do not provide any indirect payments to the CSP?
  8. Does the CSP have the discretion to unilaterally adjust their compensation?
  9. Does the responsible plan fiduciary require a description of any previous or active law suits or settlements resulting from litigation filed against the CSP?

By addressing these questions, a fiduciary can make an informed decisions based upon a documented process that will go towards addressing the procedural prudence required by ERISA.