Nationwide ERISA Suit Survives Challenge

March 15, 2006 ( - A federal judge in Connecticut has rebuffed efforts by two financial services companies seeking dismissal of a lawsuit filed by trustees of five 401(k) plans claiming the financial services firms breached their fiduciary duties.

US District Judge Stefan Underhill of the US District Court for the District of Connecticut said a reasonable jury could find that Nationwide Financial Services Inc. and Nationwide Life Insurance Co. were plan fiduciaries under the Employee Retirement Income Security Act (ERISA).

The trustees deserved a chance to present further evidence against the Nationwide companies, Underhill asserted.

“A rational factfinder, viewing the evidence in the light most favorable to the Trustees, could find that Nationwide’s ability to select, remove, and replace the mutual funds available for the Plans’ investment constituted discretionary authority or discretionary control respecting disposition of plan assets, and thus that Nationwide is an ERISA fiduciary,” Underhill wrote in his opinion. “The Trustees have also raised triable issues concerning whether the challenged payments constitute plan assets under a functional approach and whether, even if the revenue-sharing payments do not constitute plan assets, Nationwide’s service contracts constitute prohibited transactions.”

According to the court, the Nationwide companies offered the plans various investment options, including insurance products such as variable annuities. The variable annuity contracts allowed the plans and plan participants to invest in a variety of mutual funds selected by Nationwide.

The trustees’ allegations against Nationwide partly center on a system dating back to the early to mid-1990s when Nationwide implemented a system under which mutual funds would make payments to the Nationwide companies based on a percentage of the assets that the plans and participants invested in the mutual funds.

In 2001, the trustees sued the Nationwide companies alleging that the companies’ revenue-sharing arrangement with the mutual funds constituted transactions prohibited by ERISA. In response, Nationwide requested that the trustees’ suit be dismissed, asserting that they were not subject to ERISA’s prohibited transaction rules because they were not plan fiduciaries and because the revenue-sharing payments were not plan assets.

In denying the companies’ motion, the court noted that while the companies were not plan fiduciaries for all purposes, a reasonable jury could find that they acted as fiduciaries through their indirect authority or control over the participant contributions made to the mutual funds. Also, Underhill said that a reasonable jury could conclude that the Nationwide companies exercised authority or control over disposition of plan assets – making them plan fiduciaries – by controlling which mutual funds were available investment options.

The full opinion in Haddock v. Nationwide Financial Services Inc., D. Conn., No. 3:01cv1552 (SRU), 3/7/    here .