A federal judge has granted final approval of a $14 million class action settlement in an ERISA suit against New York Life Insurance Co. (NYL). The suit was brought by employees who claimed the company mismanaged its pension funds by exclusively investing billions in NYL’s own mutual funds. According to the suit, the key problem with the practice was that it caused the NYL pension plans to pay investment management fees and expenses far in excess of what the plans should have paid. The suit alleged that the company knew, or should have known, that the fees were far in excess of what the plans would have been charged if they had invested in non-NYL mutual funds, which must compete for the business of large institutional investors on the basis of price.
The NYL mutual funds “never had to compete” for the business of pension plans because the plans’ trustees were NYL officers who had “conflicting loyalties” and “effectively rubber-stamped” the recommendations of their investment adviser. But the investment adviser, according to the suit, was the president of the NYL mutual funds and his compensation was tied to the amount of assets under the funds’ management. Apparently, he had to know that withdrawal of the pension funds’ assets from the mutual funds would be “disastrous” because the mutual funds depended on the pension plans “for their sustainability and profitability.”
The plaintiffs contended that “the result of these conflicts was imprudent investing and the waste of millions of dollars each year in excessive investment fees and expenses.” Until the suit was filed, NYL did nothing to remedy the situation “even when the imprudence of their use of retail-priced mutual funds with associated excessive fees and expenses was directly brought to their attention by a third-party consultant.” The pension plan trustees hired DeMarche Associates in 1999 to conduct an “asset allocation” study for the plans. DeMarche discovered that the majority of the pension plans’ assets were invested in NYL’s proprietary mutual funds and advised the trustees that the plans could save more than $7 million annually in fees “simply by moving their investments from the funds to NYL’s separately managed account program, which was run by the identical portfolio managers and pursued the identical investment strategies as the funds but at a fraction of their cost,” the plaintiffs team argued. But the plaintiffs’ lawyers said the trustees “did not act on DeMarche’s recommendation for 18 months, and not until after the filing of this lawsuit.”
The settlement also calls for New York Life Insurance to take steps to prevent any future breaches of fiduciary duty by the pension plan trustees. The trustees have agreed to hire an independent adviser, which will also have fiduciary responsibility to act prudently and to provide advice to the trustees about appropriate investments for each of the plans. Under the terms of the settlement, the independent adviser must be retained through May 2010. In approving the settlement, the court concluded that although the maximum recovery in the case was $70 million, and the plaintiffs were recovering only 20% of that amount, the settlement was “fair and reasonable” in light of the significant risks that further litigation posed. The court found that “the risks of litigation could have negated or reduced any possible recovery.”
The plaintiffs’ lawyers conceded that they faced significant risks in establishing liability because the pension plans are currently “overfunded” from recent contributions by NYL. As a result, the company could argue that even if the pension plans were charged excessive fees, any loss suffered was to the plans’ surplus and did not endanger benefits funding. And for the 401(k) plans, the company could argue that even though alternative investment vehicles could have proven less costly, the use of mutual funds is generally common for 401(k) plans. The judge agreed, saying that if the case had gone to trial, and if the defendants were able to prove that use of the mutual funds “was not so deficient as to preclude their use by a reasonable fiduciary,” any recovery for the 401(k) plans “could be limited or negated.” Taking everything into consideration, this appears to be a good settlement of a difficult case.
Source: Legal Intelligencer
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