K Plan Participant Suit Against AUL Annuities Continues

May 26, 2004 (PLANSPONSOR.com) - A participant lawsuit claiming annuity investments in a 401(k) plan were fraudulently represented has been allowed to carry through.

>Former participants of Computer Business Services Inc’s 401(k) plan had filed suit against American United Life Insurance Co (AUL) following the termination of the defined contribution plan in 1997. The Indiana Court of Appeals, upholding a trial court’s initial ruling, denied the AUL’s request for summary judgment, allowing the suit to proceed.

>In denying the request for summary judgment, the trial court found in the original ruling evidence of fraudulent marketing activity when AUL positioned annuity investments in a 401(k) plan as the only method of obtaining tax deferral.   Additionally, the lower court found that even though AUL was not a fiduciary for the plan, it still maintained a special position with the promise to provide employees with investments that will assist participants in meeting their retirement needs.   Because of this relationship, AUL had a duty to disclose to participants of the plan that the 401(k) was funded solely with a group annuity contract. The participants contend the information was not disclosed.

>AUL appealed the decision, saying employees were judicially estopped from pursuing their claims because they admitted at trial that there was no “redundant” tax deferral by using an annuity contract to fund the 401(k) plan.   However, the appeals court rejected AUL’s contention, finding the basis of the employees’ complaint “is clear and unequivocal: the qualified retirement plan itself provides tax deferral benefits and it was not necessary to purchase a deferred annuity to achieve that result, but the plaintiffs were not made aware of that fact through their dealings with AUL.   The ‘admission’ that there is but one tax deferral in this scenario does not affect the substance of the plaintiffs’ complaint and AUL is not entitled to summary judgment on this basis,” according to the opinion authored by Judge Margaret Robb and joined by Judges Patrick Sullivan and Terry Crone.

>Also rejected by the appellate court was the company’s contention that the lower court erred in allowing AUL to be sued for fraud in the absence of a fiduciary relationship. “[T]he existence of a fiduciary relationship is not the only basis for a claim of fraud,” Robb said in the opinion, because of the trust relationship created by AUL when the firm held itself out as a “specialist” in retirement savings plans.

The case is American United Life Insurance Co. v. Douglas , Indiana Court of Appeals, Number 29A02-0304-CV-350.