ING Settles ERISA Class Action Lawsuit Over Revenue Sharing Practices

by Thomas E. Clark Jr. – April 14, 2014

On Friday April 11, 2014 the parties in Healthcare Strategies v. ING Life Insurance and Annuity Co. filed a motion indicating they have settled their lawsuit and are now seeking approval of the district court. In total, ILIAC agreed to pay $14,950,000 in damages and agreed to significant changes to its business practices regarding fees and revenue sharing. Here is a copy of the motion seeking settlement. The settlement agreement is attached to the motion as Exhibit A.


The plaintiffs, a class of plan administrators of all plans that have a group annuity contract or group funding agreement with ING, had brought claims alleging that:

(1) ILIAC has included certain mutual funds as investment options based on the funds’ revenue sharing payments to ILIAC rather than the funds’ potential to benefit the plans

(2) ILIAC’s receipt of revenue sharing payments constitute prohibited transactions under ERISA 406(b)(3)

(3) The fees charged by ILIAC to the plans do not bear a meaningful relationship to the cost of the services provided, and they thus constitute excessive compensation to ILIAC, and

(4) By taking as its compensation the spread between the guaranteed payment and the investment performance of assets in fixed accounts and guaranteed accumulation accounts, ILIAC has retained excessive compensation and engaged in self-dealing.

The parties had a 4 week trial in the Fall of 2013 with the decision of the court still pending.

The Settlement

In their trial briefing, the plaintiffs had alleged $640,723,470 in disgorgement damages against ILIAC, which amounted to all revenue sharing payments it received between 2005 and 2013. The settlement of $14,950,000 represents just 2.33% of the original damages amount and with the plaintiffs’ attorneys requesting $6,200,000 (about 42% of the settlement amount) in fees and $615,000 in expenses, this decreases to 1.3%.

ILIAC agreed to the following changes in business practices to be completed within 6 to 12 months after final approval from the court:

Defendant-Initiated Changes to Product Menus

Additions. Defendant will specifically identify to plan sponsors, via ILIAC’s plan sponsor website, any addition of a fund to a Plan’s Product Menu at the time of the addition. Defendant will update its new customer proposals, prospective plan sponsor booklets and plan sponsor website to inform plan sponsors that such additions are identified on the plan sponsor website.

Removals. Defendant will provide to plan sponsors written notice of any removal of a fund from a Plan’s Product Menu. Such notice shall be published on ILIAC’s plan sponsor website at least thirty (30) days prior to the removal, and shall state the effective date of the removal. Defendant will update its new customer proposals, prospective plan sponsor booklets and plan sponsor website to inform plan sponsors that such deletions are identified on the plan sponsor website.

Substitutions. ILIAC will not exercise any authority to make a substitution of one fund for another (i.e., transfer current investment in existing Fund A to Fund B) or to delete/remove a fund from a Plan’s Product Menu if the Plan already offers such fund on its Plan Menu, and shall modify its contracts to eliminate any such authority to the extent applicable.

Disclosures of Fund-Related Fees and Expenses

ILIAC shall provide on the plan sponsor website a disclosure, in the form of Exhibit “G” to the Settlement Agreement with respect to fund fees and expenses, including revenue paid to ILIAC, if any, for each fund available within the Plan’s Product Menu. Defendant shall discontinue use of the report in the form of Trial Exhibit 16 for any purpose (see Exhibit “H” to the Settlement Agreement).

Defendant shall eliminate language that Revenue Sharing Payments neither directly nor indirectly increase mutual fund expenses and replace it with language that Revenue Sharing Payments may have a direct impact or indirect impact on mutual fund expenses and the share class chosen by ILIAC.

Defendant shall add language that ILIAC offers various Product Menus to retirement plan customers depending on the amount of direct fees they choose to pay and other factors, and that these various Product Menus have varying degrees and magnitude of Revenue Sharing associated with them (including one Product Menu that pays no Revenue Sharing of any kind and is paid for entirely by direct fees assessed to the plan and/or its participants).

Defendant shall add language that, if a plan sponsor wishes to pay all fees to Defendant directly by choosing a Product Menu for which Defendant does not accept any Revenue Sharing Payments from mutual funds, the plan sponsor or its representative should contact Defendant about available options and pricing, including the information regarding the investment options available on such menu(s) and the expense ratios associated with those investments.

Defendant shall add language that ILIAC chooses to offer various share classes of mutual funds on different Product Menus, that only one share class of each mutual fund investment is typically offered on a given menu in light of pricing and product requirements, and that the primary difference between share classes of a given mutual fund is generally the expense ratio of the mutual fund (i.e., the amount that the plan’s participants pay as a fund expense) and the amount of Revenue Sharing that ILIAC receives from the mutual fund, which is paid from the mutual fund expense ratio.

Defendant shall advise Plans that fund fee adjustments (“FFA(s)”) are utilized to increase (and, for certain menus, decrease) the revenue received by ILIAC for certain mutual funds that do not offer sufficient (or, in some case, offer more than sufficient) Revenue Sharing Payments to otherwise be offered on a given Product Menu (depending on the Revenue Sharing requirements, if any, applicable to the Product Menu) and that, although FFAs do not always “normalize” or “neutralize” the effect of Revenue Sharing Payments in total, that is their object and intent.

Defendant shall advise Plans that more detailed information regarding the share classes available on various menus offered by ILIAC, as well as the Revenue Sharing associated with those share classes, and the Revenue Sharing received and fund fee adjustments in connection with the Plan’s investments, shall be provided upon written request to ILIAC.

Other Provisions

Future Plan customers shall be offered the specific opportunity to pay all fees to Defendant directly by choosing a Plan Menu (or, to the extent applicable, more than one Plan Menu) for which Defendant does not accept any Revenue Sharing Payments from mutual fund companies.

As part of the Settlement, each of the Plans would be deemed to have elected to reinvest all mutual fund dividends from the date of initial group annuity contract/group funding agreement. Defendant’s point of sale disclosures will now provide that, as a result of entering into a contractual relationship with Defendant through a group annuity contract or group funding agreement, each Plan is consenting to reinvestment of mutual fund dividends, that reinvestment of dividends may result in undesirable concentration in certain investments over time, and that Defendant makes available certain tools to re-balance investment portfolios.

Defendant agrees to provide thirty (30) days’ written notice of any change in the amount of an FFA.

The Class Wide Release

Previously, 16 plan administrators opted out of the case and all remaining class members will be given a chance to opt out again. ILIAC has required in the Settlement Agreement that  if class members representing more than 1% of the distributable damages opt-out,  ILIAC has the ability to terminate the settlement agreement. Said another way, 99% of class members must stay part of the lawsuit.

In exchange for the relief listed above, any class member remaining in the lawsuit will be required to release a rather robust list of claims that don’t seem to have any time limitation at all (meaning, this settlement may release all past, present, and future claims, even if the conduct occurs after the settlement date):

6.1 Releases. Upon the Effective Date, the Class Members, on behalf of themselves, their predecessors, successors and assigns, their Plans, and their Plans’ participants and their beneficiaries, shall be deemed to have, and by operation of the Final Order and Judgment shall have, fully, finally, and forever released, relinquished and discharged, and shall be forever enjoined from the prosecution of, each and every Released Claim, whether arising before or after the date of the Final Order and Judgment, against any and all of Defendant’s Released Parties, provided, however, that nothing herein is meant to bar any claim seeking enforcement of this Agreement or Court Orders relating to it.

1.37 “Released Claims” shall mean any and all claims, liabilities, demands, causes of action or lawsuits, known or unknown (including Unknown Claims, as defined below), whether legal, statutory, equitable or of any other type or form, whether under federal or state law, and whether brought in an individual, representative or any other capacity, that in any way relate to or arise out of or in connection with acts, omissions, facts, statements, matters, transactions, or occurrences that have been alleged or referred to or could have been alleged in the Action, including in any court filing or any discovery request or response including, but not limited to,

(a) matters pertaining to or arising out of the solicitation, negotiation, or receipt of Revenue Sharing (defined below);

(b) claims of excessive fees of any kid in connection with Mutual Funds, Proprietary Funds, the Fixed Account or the General Accumulation Account or the administration of the Plans;

(c) matters pertaining to disclosure, receipt or retention of Float;

(d) disclosures about Revenue Sharing or any administrative or investment management fees paid directly or indirectly by the Plans or their sponsors;

(e) assembly, substitution, addition, or removal of investment options from Product or Plan Menus, including the appropriateness of inclusion of Mutual Funds, Proprietary Funds, the Fixed Account and the General Accumulation Account in Product or Plan Menus;

(f) the investment performance of Mutual Funds, Proprietary Funds, the Fixed Account, and the General Accumulation Account included in Product Menus or Plan Menus;

(g) Fund Agreements;

(h) operation of any Separate Accounts;

(i) the reinvestment of dividends paid by any Mutual Fund;

(j) sufficiency of the information about investment Defendant’s retirement plan business(es);

(k) contractual arrangements or conduct as a service provider relating to any Member of the Settlement Class, including, but not limited to, any alleged rights, obligations, discretion or conduct by Defendant as a service provider claimed to give rise to fiduciary status on the part of Defendant with respect to Revenue Sharing;

(l) any actions arising out of or related to the negotiation or performance of the Settlement Agreement or matters relating thereto; and

(m) all Class Members’ decisions related to the allocation of any proceeds of the Distributable Settlement Amount.

1.48 “Unknown Claims” shall mean any Released Claims which Plaintiffs and any Member of the Settlement Class do not know or suspect to exist in their favor at the time of the release of the Defendant’s Released Parties relating to the claims and allegations asserted in the the Defendant’s Released Parties, or might have affected their decision not to object to this Settlement…Plaintiffs and any Member of the Settlement Class may later discover facts in addition to or different from those which they now know or believe to be true with respect to the subject matter of the Released Claims, but Plaintiffs and any Member of the Settlement Class, upon the Effective Date, shall be deemed to have, and by operation of the Final Order and Judgment shall have, fully, finally, and forever settled and released any and all Released Claims (and Unknown Claims), suspected or unsuspected, contingent or non-contingent, whether or not concealed or hidden, which now exist, or heretofore have existed, upon any theory of law or equity now existing or coming into existence in the future relating in any way to the Action, including, but not limited to, conduct which is negligent, intentional, with or without malice, or a breach of any duty, law or rule, without regard to the subsequent discovery or existence of such different or additional facts. Plaintiffs and any Member of the Settlement Class shall be deemed by operation of the Final Order and Judgment to have acknowledged that the foregoing waiver was separately bargained for and a key element of the Settlement of which this release is a part.


Court Finds St. Peter’s Pension Plan is NOT a Church Plan & A New Case is Filed in Chicago

by Thomas E. Clark Jr. JD, LLM – April 1, 2014

Yesterday, March 31, 2014, the district court in Kaplan v. Saint Peter’s Healthcare System denied the hospital’s motion to dismiss and found as a matter of law that the hospital’s pension plan is NOT a church plan as defined by ERISA. This is the second substantive decision rejecting 30 years of IRS interpretations after a Northern District of California court found the pension plan at issue in Rollins v. Dignity Health was not a church plan. A copy of the order can be found here.

Additionally, a new case challenging the establishment of a church plan was filed on March 17, 2014 in a federal court in Chicago. We discuss the case at the end of this post.


The court’s summary of the background of the pension plan is worth looking at. The facts alleged are unique among the many similar cases filed last year in that for over 30 years, the pension plan was run as an ERISA plan before filing for an IRS letter ruling (however the uniqueness of the facts played no part in the decision):

SPHS employs over 2,800 people and, in 1974, established the Plan, which is a non-contributory defined benefit pension plan. For over thirty years, the Plan was operated as an ERISA plan—meaning, it complied with ERISA’s requirements regarding funding, reporting, and insurance premiums paid to the Pension Benefit
Guarantee Corporation (“PBGC”)—and represented such to its employees via Plan documents and other written materials. In 2006, during the rise of the nationwide economic downturn, SPHS “concluded that [its Plan] was a church plan” and proceeded to file an application for church-plan status with the Internal Revenue Service (“IRS”).  Meanwhile, SPHS continued to pay insurance premiums to PBGC as an ERISA plan. Notwithstanding its IRS application, SPHS waited until November 2011 to notify its employees of its application for church-plan status. On August 14, 2013, in a private letter ruling, the IRS concluded that SPHS’s Plan is a church plan as defined in ERISA.

The Court’s Interpretation of the Church Plan Exemption

Although both sides put forth multiple levels of arguments depending on how the court would rule (legal arguments, factual arguments, and constitutional arguments), the court started and stopped with the parties’s legal arguments as to exact meaning of the definition of the church plan exemption found in ERISA. As a reminder to those who may not be fully immersed, ERISA provides a few narrow exemptions from its its hundreds of requirements for retirement plans established by churches and by governments. These are known as “church plans” and “governmental plans.”

The positions of the parties were polar opposites. Plaintiffs, wanting the protections found in ERISA, argued that the Saint Peter’s pension plan was not a church plan because the hospital itself is not a church and only plan’s established by a church can be church plans. The defendant hospital argued that “a pension plan established and maintained by a tax exempt corporation controlled by or associated with a church is a church plan.”

The court agreed with the plaintiffs:

the interpretive question here is whether a non-profit entity, purportedly controlled by or associated with a church, may both establish and maintain a church plan. Based on the plain text of the statute, the simple answer is no. Starting with subsection A, it is clear that Congress intended for a church plan—first and foremost—to be established by a church. Once the church establishes the plan, the church must also maintain it. From these two requirements, a church plan is born—hence, “[t]he term ‘church plan’ means a plan established and maintained . . . by a church or by a convention or association of churches . . . .” 29 U.S.C. § 1002(33)(A)

The court then went on to address sub-section C which was added to ERISA in 1980 and has been the source of differing opinions ever since:

Congress has explicitly provided two ways to fall within the church plan exemption: (1) a plan established and maintained by a church, or (2) a plan established by a church and maintained by a tax-exempt organization, the principal purpose or function of which is the administration or funding of the plan, that is either controlled by
or associated with a church. Once a church plan is established in one of these ways, subsection C(ii) delineates what individuals may participate in the church plan as employees of the church. The key to this interpretation is to recognize that subsection A is the gatekeeper to the church plan exemption: although the church plan definition, as defined in subsection A, is expanded by subsection C to include plans maintained by a tax-exempt organization, it nevertheless requires that the plan be established by a church or a convention or association of churches. In other words, if a church does not establish the plan, the inquiry ends there. If, on the other hand, a church establishes the plan, the remaining sections of the church plan definition are triggered.

the Court concludes that Congress was cautious in crafting the definition of a church plan and therefore the definition means what it says—that a church plan must,
from the outset, be established by a church and can be maintained by an organization controlled by or associated with a church.

The court then went on to reject defendants’ expanded interpretation of the definition on multiple grounds worth reviewing in the order, but ultimately stating this:

If the Court were to accept SPHS’s interpretation, any tax-exempt organization can establish its own pension plan, maintain it, and then employ the church plan exemption by purporting to be controlled by or associated with a church. In this context, a tax-exempt organization itself would have to be considered a church under the statute because a church is the only entity allowed to establish a church plan. Defendants’ contention in this regard is unreasonable. The Court cannot conclude that Congress intended to create this slippery slope, especially considering that the point of enacting ERISA was to promote the interest of employees and their beneficiaries. Opening the door to expand the church plan exemption to this extent would place more employees at risk of having insufficient benefits upon retirement. What must be kept in mind is that ERISA is a remedial statute, so any exemptions included thereunder should be construed narrowly. See Rodriguez v. Compass Shipping Co., 451 U.S. 596, 614 n.33 (1981). Defendants’ interpretation would achieve quite the opposite.

In addressing the many contrary IRS rulings, including the one issued for the Saint Peter’s plan, the court found that because the plain text of the statute is clear, it had no reason or need to defer to the opinion of the IRS. “The judiciary is the final authority on issues of statutory construction and must reject administrative constructions which are contrary to clear congressional intent.” The court further found in rejecting the IRS letter issued to the plan, “the IRS private letter ruling is conclusory, lacking any statutory analysis, and cannot be used as precedent because the ruling was issued in a non-adversarial setting based on information supplied by SPHS.”

An Update on the Other Cases

As noted above, this is now the second case to explicitly find that only a church can establish a church plan.

Just last week, oral arguments were also heard on the defendants’ motion to dismiss in Chavies v. Catholic Health East. Shortly thereafter, the court denied the motion to dismiss without prejudice and allowed 120 days of discovery on the issue of whether the hospital itself is a church as defined by ERISA and the Internal Revenue Code. The defendants will then be free to file another motion to dismiss or a motion for summary judgment.

The court in Medina v. Catholic Health Initiatives previously ruled in August 2013 that because of the factual nature of the defendants’ motion to dismiss, that it would be converted into a motion for summary judgment. (See our coverage here) Since then, the parties have presumably been engaged in the full discovery process and numerous motions have been filed by the plaintiffs that are currently outstanding.

Finally, the Overall v. Ascension Health case still has a fully briefed motion to dismiss outstanding and is awaiting decision by the court.

 A New Case is Filed in the Northern District of Illinois – Stapleton v. Advocate Health Care Network

On March 17, 2014, a group of plaintiffs seeking to represent the Advocate Health Care Network Pension Plan brought a new lawsuit in the Northern District of Illinois entitled Stapleton v. Advocate Health Care Network. A copy of the complaint can be found here. Similar to the previous five lawsuits brought, the plaintiffs claim the pension plan is not entitled to the church plan exemption. Worth noting, this case differs from the previous five in that it does not involve a hospital alleged to be affiliated with the Catholic Church, but instead the United Church of Christ (“UCC”) and the Evangelical Lutheran Church in America (“ELCA”). Additionally, the plan at issue here is different than the other five in that it is a cash-balance plan, rather than a traditional defined benefit pension plan.