Nationwide Financial Services has filed a motion for preliminary approval of a settlement of a lawsuit filed by trustees of five qualified retirement plans alleging that the provider’s revenue-sharing arrangement with mutual funds constituted transactions prohibited by the Employee Retirement Income Security Act (ERISA).
In its motion, Nationwide says the settlement secures a number of significant changes to its business practices that will result in different investment options and enhanced disclosures for the plans and for future purchasers of Nationwide’s annuity contracts and trust platform products. Nationwide will also pay $140,000,000 to the class identified in the lawsuit.
The suit, Haddock v. Nationwide, alleges that Nationwide violated ERISA when it kept fees that it received from nonproprietary mutual funds that it offers through its defined contribution platform. Nationwide is the third-largest writer of 401(k) contracts in the nation, the company says in its press releases.
The lead plaintiff in the action is the deferred compensation plan of Flyte Tool & Die, a plastic molding company in Bridgeport, Connecticut. The plaintiffs claim that the refunds of management fees that Nationwide received from nonproprietary mutual funds were plan assets that should have been returned to the plans. Furthermore, they allege that, in not revealing these “kickbacks,” Nationwide misrepresented the level of fees it was receiving.
By retaining the fees and not disclosing them, the plaintiffs claim Nationwide violated ERISA’s prohibited transaction and fiduciary duty rules. They say the provider purposefully chose to include outside mutual funds with high management fees in order to maximize the “undisclosed kickbacks” it received. The plaintiffs are asking for a return of these fees along with damages plus all profits that Nationwide earned on them.
In 2006, the U.S. District Court for the District of Connecticut denied Nationwide’s motion to dismiss the case, saying a reasonable jury could find that Nationwide Financial Services Inc. and Nationwide Life Insurance Co. were plan fiduciaries under ERISA, and the trustees deserved a chance to present further evidence against the Nationwide companies. Nationwide argued it was not subject to ERISA's prohibited transaction rules because it was not a fiduciary to the plans and because the revenue-sharing payments were not plan assets.
Nationwide 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 court said, “A rational factfinder… 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.” The court also said, "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."
The following year, U.S. District Judge Stefan R. Underhill again turned away an attempt by Nationwide to have certain claims dismissed because they were not brought up in previous versions of the complaint. In 2008, Underhill said Nationwide’s attempt to countersue the trustees because they had the ultimate responsibility for purchasing annuity contracts and making changes to investments options, they knew of the revenue sharing payments, and they received cost-savings from those revenue sharing payments should be allowed, but warned the provider that the counterclaims would ultimately be unsuccessful.
The settlement agreement calls for substantial changes to Nationwide’s disclosure and fund selection practices, including disclosures of all fees and revenue-sharing payments, notices of fund changes, and the opportunity to transfer from certain investment products to products for which payments are credited to the plan in the form of reduced asset fees.
More details of the settlement agreement can be found in the motion for preliminary approval.