But has the insurance company actually done wrong, or is Sprenger & Lang simply looking for another notch in its ERISA litigation gunbelt? As such suits multiply, the question of who the good guys are becomes murky. What is clear is that sometime between now and June 30, a lawsuit may be filed accusing New York Life of detrimentally investing its pensions in its own products.
While the exact accusations against New York Life and its handling of its two defined benefit and two defined contribution plans (one each for employees and for agents) are not yet final, ongoing discussions between the insurance company and Sprenger & Lang have focused on New York Life’s:
- decision to invest defined benefit plan assets in the company’s internally managed Mainstay mutual funds, which allegedly generate higher revenues for the company than a separate account alternative, where New York Life paid the fees to another provider. New York Life says payouts are linked to service and pay rather than performance returns, the defined benefit plans ($2.7 billion in assets) are overfunded by $900 million, and the company pays administrative costs.
- use of its 401(k) plan assets to boost its mutual funds’ sizes, and revenues. New York Life says offering internal funds to a financial service company’s 401(k) participants is permitted by ERISA Prohibited Transaction Exemption (PTE) 773, and that their line-up provides a sound spectrum of investment options. The 401(k) plans total about $1.6 billion in assets.
- failure to release pension plan funds from “outmoded, disadvantageous deposit administration contracts.” New York Life says these contracts, forerunners of the GICs of today, form the fixed-income components of the plans?Einvestment portfolios and deliver 8%-10% annually. They are underwritten by New York Life and have “significantly contributed to the $900 million overfunding of our defined benefit plans,” according to New York Life Executive Director and Partner George Trapp. Such investments are permitted by Section 408(b)(5) of ERISA.
- actions regarding the individual claims of former Monitor Capital Advisors Inc. president James Mehling. Mehling says he was terminated in order to prevent his obtaining early retirement and severance benefits, and that New York Life sought to “cover up” these “schemes.” (Monitor is a Princeton, New Jersey-based subsidiary of New York Life). “Mr. Mehling was terminated for performance reasons unrelated to the administration of the pension plans,” said New York Life Vice President William H. Werfelman, Jr.
James Mehling is the only New York Life employee currently named as representing the threatened class action suit.
New York Life’s funds all show positive returns and middle-of-the-road or better performance when examined by such agencies as Morningstar and Lipper (exception: its indexed bond fund shows a loss of 2.18% but still holds a three-star ranking from Morningstar and top one-third performance against its peers by Lipper).
Werfelman claims the class action suit appeared used as a threat to settle a claim filed last fall by Mehling. “Sprenger & Lang took over Mehling’s suit. We then received a threatening letter from Sprenger & Lang that was accompanied by press clippings about their class actions against SBC Communications and First Union,” said Werfelman. “The implication was