9th Circuit Clears NEA in Annuity Sales Flap

December 21, 2010 (PLANSPONSOR.com) – A federal appellate court has ruled that the National Education Association (NEA) cannot be held liable for a fiduciary breach because of its endorsement and marketing of annuities in 403(b) plans offered to NEA members.

The 9th U.S. Circuit Court of Appeals asserted that the annuities were component parts of 403(b) plans not subject to the Employee Retirement Income Security Act (ERISA). The appellate panel rejected plaintiffs’ arguments that the annuities established by the teachers’ union and were themselves ERISA-governed pension programs.

Writing for the appellate court, Judge Diarmuid F. O’Scannlain affirmed a lower court decision in the suit filed in Washington state by a group of public school teachers who charged that the NEA had committed the ERISA breach by improperly paying millions of dollars in undisclosed commissions to Nationwide Life Insurance Co. and Security Benefit Life Insurance Co. and then taking millions of dollars in kickbacks for its endorsement of the annuities offered by Nationwide and Security Benefit (see 403(b) Annuities from Employee Organization are not ERISA Plans).  Nationwide and Security Benefit provided annuities sold under an NEA-endorsed program the plaintiffs referred to as the “Valuebuilder Plan.”

After receiving the appeal of the lower court’s order in favor of the defendants, the 9th Circuit asked the U.S. Department of Labor (DoL) to file a friend of the court brief addressing whether the NEA is legally capable of establishing an ERISA-governed 403(b) plan. The DoL argued it is not.

O’Scannlain concluded: “We are therefore satisfied that the NEA, which is not even registered to sell securities, did not ‘establish or maintain’ the annuity contracts in question. These annuity contracts cannot, therefore, be ‘employee pension benefit plans’ covered by ERISA.”

The case is Daniels-Hall v. National Education Ass’n, 9th Cir., No. 08-35531.

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