A news release from New York state Attorney General Eliot Spitzer said his joint investigation with state of Connecticut authorities found that the payments were being concealed from plan sponsors “who believed that the brokers were acting on their behalf. But instead of acting as fiduciaries for the pension plans, the brokers had become, in effect, paid sales representatives for Hartford.”
With the aid of the brokers who participated in the scheme, The Hartford was able to sell more than $800 million worth of group annuity pension plans from 1998 to 2004, Spitzer alleged. Major companies and institutions that faced increased costs as a result of this scheme include: Montgomery Ward Co.; Bennetton Sportssystem USA., Inc; PriceWaterhouseCoopers; and Mt. Sinai Medical Center of Florida.
In its own statement, The Hartfordformally apologized for its acknowledged misconduct. The apology reads in part, “It was wrong to withhold from our pension plan customers the full amount of compensation paid to brokers in connection with the placements of these annuities.”
According its statement, The Hartford will pay $20 million, of which $16.1 million will go to plan sponsors who purchased terminal or maturity funding annuities between January 1, 1998 and December 31, 2004. The balance of $3.9 million is to be divided equally between the states of New York and Connecticut.
According to Spitzer, the allegations concerned fake "expense reimbursement agreements" (ERAs) from The Hartford to four brokers who held themselves out as trusted advisors to retirement plans:Dietrich & Associates,Brentwood Asset Advisors,BCG Terminal Funding, and USI Consulting Group.
"The ERAs actually had nothing to do with expense reimbursements; they were simply volume-based bonuses designed to reward brokers for pushing Hartford products," the Spitzer statement asserted.
One Hartford officer said in an e-mail that the ERAs, which amounted to hundreds of thousands of dollars, were intended "to change the buying habit of the [brokers] . . . to stimulate business we would not otherwise get," according to the Spitzer statement.
The success of the covert scheme was critical for The Hartford because it could not compete in the group annuity marketplace, Spitzer alleged. As a company executive admitted in an internal e-mail, "Our prices are not competitive in open bidding situations."
According to The Hartford, the New York-Connecticut probe focused on The Hartford's arrangements with brokers handling terminal and maturity funding group annuities. Both products involve the purchase of a single premium group annuity by a plan sponsor to assume all or a portion of the pension plan's liabilities. A terminal funding annuity is used when a company terminates its pension plan, while a maturity funding annuity is used by an ongoing business to satisfy its future obligations to pension plan participants.
The company said that to compensate producers who sold these annuities, The Hartford typically paid them a standard commission. In addition, The Hartford also had an expense reimbursement agreement with certain producers. During the six year period, 1998-2004, the Company paid the four producers a total of approximately $4 million.
The Hartford admitted, "While The Hartford disclosed to plan sponsors the amount of standard commission paid, it did not disclose the additional payments made pursuant to the expense reimbursement agreements."
In addition to the fine, The Hartford will also implement reforms designed to bring fair play and transparency to the marketing of retirement products.
"This investigation shows how payoffs and deception influenced major deals for retirement products," Spitzer said. "This was wrong. But the company at the center of the scandal has acknowledged misconduct, provided compensation for those who were harmed, and implemented reforms that will help protect retirees in the future."